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APPLETON'S  RAILWAY  SERIES 

EDITED  BY 

EMORY  R.  JOHNSON,  Ph.D. 


REGULATION  OF  RAILROADS  AND 
PUBLIC  UTILITIES  IN  WISCONSIN 


REGULATION   OF    RAILROADS 

AND  PUBLIC  UTILITIES 

IN  WISCONSIN 


BY 

FRED  L.  HOLMES 


D.  APPLETON  AND   COMPANY 
NEW  YORK  AND  LONDON 

1915 


Copyright,  1915.  by 
D.  APPLETON  AND   COMPANY 


Printed  in  the  United  States  of  America 


TO 
THE   MEMORY   OF 

MY  MOTHER 


328 


PREFACE 

Wisconsin  has  been  one  of  the  pioneers  in  the  field  of 
railroad  and  public  utility  regulation  by  a  state  commis- 
sion. The  results  of  this  legislation  have,  on  the  whole, 
been  satisfactory.  The  aim  of  this  volume  is  to  present 
the  important  facts  of  this  history  of  railroad  and  public 
utility  regulation ;  to  analyze  the  chief  problems  confront- 
ing this  system  of  control  and  to  measure  the  accomplish- 
ments, industrially  and  politically. 

This  study  is  the  outcome  of  a  continuous  personal  in- 
terest in  the  work  of  the  Commission  since  its  organization 
in  1905.  As  a  member  of  the  legislature,  serving  as  chair- 
man of  the  assembly  committee  on  transportation,  the 
writer  has  watched  the  development  of  the  state  regulation 
idea  in  Wisconsin,  noted  its  shortcomings  and  its  achieve- 
ments. He  has  seen  the  confidence  of  the  public  in  this 
plan  manifested  by  each  succeeding  legislature,  which  has 
delegated  to  the  Commission  wider  powers.  An  earnest 
attempt  has  been  made  to  set  down  these  facts  about  regu- 
lation impartially.  If  there  be  bias  it  is  in  favor  of  the 
present  system,  which  has  accomplished  so  much  for  the 
public,  when  contrasted  with  the  deplorable  condition — 
favoritism  to  shippers,  inequality  of  rates  and  inadequacies 
of  service — previously  existing. 

The  files  of  the  Commission  have  been  at  the  writer's 
disposal ;  its  statisticians  and  experts  have  been  freely  con- 
sulted for  information  that  would  throw  more  light  on  any 
beclouded  problem  of  regulation.     Wherever  possible  quo- 

vii 


viii  PREFACE 

tations  have  been  given  from  decisions,  or  the  numerous 
published  addresses  of  the  commissioners,  to  more  clearly 
state  the  economic  principles  followed  in  determining  many 
of  these  complicated  issues.  Copious  references  have  been 
made  to  decisions  and  other  public  documents,  where  the 
reader  may  pursue  an  investigation  along  any  separate 
line.  Many  of  the  chapters  embrace  subjects  that  could 
better  be  handled  alone  in  a  single  volume.  Hence  no 
attempt  has  been  made  to  present  other  than  the  more 
important  legal  and  economic  considerations  and  their 
relationship  to  the  whole  problem  of  regulation. 

To  the  many  friends  of  the  writer,  whose  names  shall 
not  be  recorded  but  who  have  rendered  invaluable  aid  and 
encouragement,  I  wish  to  evidence  my  profound  apprecia- 
tion. "Without  the  cooperation,  judgment  and  painstaking 
care  in  answering  all  sorts  of  requests  made  upon  members 
of  the  Commission  and  its  staff,  this  book  would  have  been 
wholly  inadequate  in  presentation  and  incomplete  in  data. 
Especially  do  I  wish  to  acknowledge  the  faithful  service 
and  criticisms  of  the  commissioners  and  staff,  who  have 
read  most  of  the  chapters:  Professor  Ford  MacGregor,  of 
the  University  of  Wisconsin ;  Dr.  T.  S.  Adams,  of  the  Wis- 
consin Tax  Commission ;  Judge  E.  Ray  Stevens,  of  the  Cir- 
cuit Court  of  Dane  County,  Wisconsin;  Justice  John 
Barnes,  of  the  Wisconsin  Supreme  Court,  formerly  chair- 
man of  the  Commission;  and  F.  W.  MacKenzie,  managing 
editor  of  La  Follette's  Weekly,  who  have  ungrudgingly 
given  time  in  preparing  suggestions  and  making  helpful 
changes. 

The  data  presented  in  this  book  were  found  scattered 
through  the  files  of  the  Commission,  though  never  gathered 
into  a  continuous  related  statement  as  here  presented.  It 
was  this  fact,  coupled  with  the  current  misinformation  in 
some  quarters  of  the  advance  that  has  been  made  by  regu- 
lation which  has  encouraged  me  in  the  work.     Here  will 


PREFACE  ix 

be  found  the  results  of  the  application  of  doctrines  of 
regulation  that  are  being  challenged  for  authority  or  con- 
troverted in  all  states  where  they  are  still  untried. 

Fred  L.  Holmes. 

Madison,   Wisconsin. 
May  18,  1915. 


CONTENTS 


CHAPTER  PAGE 

I.     Provisions  of  the  Railroad  and  Utility  Laws  1 

II.    Commission  Organization  and  Procedure  .        .  9 

III.  Physical  Valuation  op  Railroads  and  Utilities  21 

IV.  Rate  op  Return 43 

V.     Standardization  of   Service        ....  57 

VI.    Uniform  Accounting 69 

VII.     Depreciation 79 

VIII.    Putting  Utilities  on  a  Business  Basis    .        .  96 

IX.    Making  of  Railroad  Rates        .        .        .        .  109 

X.    Making  of  Utility  Rates 143 

XI.     Street  and  Interurban  Railways      .        .        .159 

XII.     Electric,  Gas  and  Heating  Utilities        .        .  170 

XIII.  Telephone  Utilities 193 

XIV.  Water  Utilities             206 

XV.    The  Indeterminate  Permit  and   Convenience 

and  Necessity  Laws 221 

XVI.    Regulation  op  Stocks  and  Bonds    .        .        .  237 

XVII.    Water-Power  Legislation 249 

XVIII.    Improvements  in  Safety  and  Convenience  of 

Railroad   Service 262 

XIX.    Some  Accomplishments  in  Handling  Railroad 

Rates 274 

XX.     State  Control  of  Municipally  Owned  Plants  277 

XXI.     State  Versus  Local  Control      ....  289 

XXII.     Does  Regulation  Retard  Investments?     .        .  312 

XXIII.  Commission  and  the  Courts        .        .        .        :  •  317 

XXIV.  Conclusion             345 

Index 349 

xi 


REGULATION   OF   RAILROADS 

AND  PUBLIC  UTILITIES 

IN   WISCONSIN 

CHAPTER  I 

PEOVISIONS  OF  THE  RAILROAD  AND  UTILITY  LAWS 

The  Wisconsin  Railroad  Commission  Law  of  1905  was 
scientifically  drafted.  With  the  public  utilities  features 
later  adopted,  its  provisions  have  been  copied  in  part  by  a 
number  of  states. 

The  following  is  a  list  of  the  states  whose  laws  relating 
to  the  regulation  of  public  utilities  are  modeled  more  or 
less  after  those  of  Wisconsin.1  In  addition  to  those  given 
here  there  are  a  few  states  such  as  Florida  and  Michigan 
whose  regulation  of  telephone  matters  is  somewhat  similar 
to  that  of  Wisconsin,  and  there  are  probably  a  few  other 
states  whose  laws  resemble  the  Wisconsin  law  in  some 
respects.  It  is  believed,  however,  that  the  following  covers 
those  having  any  substantial  similarity  to  the  Wisconsin 
law: 

Arizona  Illinois 

California  Indiana 

Colorado  Kansas 

Idaho  Maine 

1  The  first  ten  states  in  this  list  were  obtained  from  an  article 
appearing  in  the  Nation  of  April  2,  1914;  the  others  have  been  ob- 
tained from  an  examination  of  the  compilation  of  utility  laws  pre- 
pared for  the  National  Civic  Federation. 

1 


2         RAILROADS  AND  PUBLIC  UTILITIES 

Maryland  Oregon 

Missouri  Pennsylvania 

Montana  Rhode  Island 

Nevada  Vermont 

New  Hampshire  Washington 

New  Jersey  West  Virginia 
Ohio 

The  original  Wisconsin  railroad  law  was  modeled  after 
the  Iowa  statute  regulating  railroads,  but  it  profited  by 
the  experience  of  other  nations  and  the  decisions  of  state 
and  federal  courts.  Most  of  the  amendments  since  made 
have  granted  extensions  of  power. 

Members  of  the  Commission  are  appointed  by  the  gov- 
ernor for  a  term  of  six  years.     Each  receives  an  annual 
salary  of  $5,000,  the  same  as  is  paid  the  chief  executive 
of  the  state.    Both  the  manner  of  appointment  and  salary 
provisions  were  against  the  precedents  in  other  states  that 
had  commissions  at  the  time.1     Nine  states  had  changed 
from  an  appointive  to  an  elective  commission,  leaving  only 
six  favoring  the  appointive  idea.     Governor  La  Follette, 
and  a  majority  of  the  joint  legislative  committee  consider- 
ing the  measure,  favored  appointment.     The  railroads  ap- 
proved an  elective  commission,  believing  that  the  election 
of  a  radical  commission  would  place  the  law  in  disrepute 
and  lead  to  its  repeal.     The  governor  and  his  supporters 
held  the  example  of  Iowa  before  the  legislature,  where, 
according  to  the  eminent  economist,  Professor  John  R.  Com- 
mons, "the  commission  was  notoriously  reputed  through- 
out Wisconsin,   at  least,   to   be   composed   of  three   men 
nominated  respectively  by  the  three  great  railroad  systems 
of  that  state."2     The  prevailing  opinion  of  the  time  was 
that  the  success  of  the  law  depended  upon  the  selection  of 

1  Review  of  Reviews,  XXXII,  76. 

2  Ibid.,  77. 


THE  RAILROAD  AND  UTILITY  LAWS        3 

the  first  commission.  So  the  Wisconsin  statute  specified 
that  one  must  have  a  general  knowledge  of  railroad  law 
and  each  of  the  others  must  have  a  general  understanding 
of  matters  relating  to  transportation. 

Broad,  discretionary  powers  are  conferred  upon  the 
Commission.  They  apply  to  both  freight  and  passenger 
traffic,  including  express,  private-car  and  sleeping-car  traf- 
fic, and  to  refrigerator,  street  and  interurban  lines. 

Unlike  the  provisions  in  many  other  states  the  Com- 
mission does  not  fix  maximum  freight  rates,  nor  is  it  com- 
pelled to  fix  rates  for  a  complete  system.  It  is  authorized 
to  review  any  or  all  rates  and,  taking  into  account  all 
evidence  that  has  a  bearing,  to  fix  after  full  hearing  a 
reasonable  rate  that  shall  be  the  legal  charge.  The  general 
power  of  the  Commission  over  railroads  is  incorporated 
in  the  following  section  of  the  statutes: 

Every  railroad  is  hereby  required  to  furnish  reasonably  ade- 
quate service  and  facilities,  and  the  charges  made  for  any  serv- 
ice rendered  or  to  be  rendered  in  the  transportation  of  passen- 
gers or  property  or  for  any  service  in  connection  therewith,  or 
for  the  receiving,  delivering,  storing  or  the  handling  of  such 
property,  shall  be  reasonable  and  just  and  every  unjust  and  un- 
reasonable charge  for  such  service  is  prohibited  and  declared  to 
be  unlawful. 

Schedules  of  all  rates,  including  joint  rates,  in  force  in 
the  state  must  be  on  file  at  the  Commission's  office  and 
two  copies  for  the  use  of  the  public  must  be  kept  at  every 
depot  where  passengers  or  freight  are  received.  The  roads 
are  still  free  to  make  special  rates.  The  law  specifically 
provides  that  nothing  in  the  act  "shall  be  construed  to 
prevent  concentration,  commodity,  transit  and  other  spe- 
cial contract  rates,"  open  to  all  shippers  but  under  Com- 
mission supervision.  All  rates  fixed  by  the  Commission  are 
absolute.     The  existing  rates  of  the  railroad   were  con- 


4  RAILROADS  AND  PUBLIC  UTILITIES 

sidered  prima  facie  lawful  and  reasonable,  which  the  roads 
cannot  change  without  the  permission  of  the  Commission, 
and  without  giving  thirty  days '  notice.  This  is  a  deviation 
from  the  practice  in  many  other  states  where  the  Commis- 
sion is  directed  to  make  lawful  rates  for  all  systems  in 
the  state  on  the  assumption  that  the  rates  of  the  road  are 
unlawful. 

When  any  rate  of  a  railroad  is  challenged,  a  hearing 
is  ordered  and  a  complete  investigation  is  made.  Up  to 
this  point,  it  must  be  shown  that  the  rate  of  the  railroad 
is  unlawful,  but  as  soon  as  the  Commission  fixes  a  new 
rate  it  in  turn  becomes  lawful  and  the  burden  rests 
upon  the  carrier  to  prove  its  unreasonableness.  Of  course, 
the  primary  principle  is  that  all  discriminations  and  re- 
bates are  prohibited  and  that  the  Commission  alone  under 
the  law  has  the  power  to  order  refunds  for  overcharges 
on  freight  shipments.  The  handling  of  these  cases  before 
the  Commission  and  before  the  courts  on  appeal  is  similar 
for  railroads  and  utilities  and  will  be  discussed  later  in 
the  chapter. 

The  Commission  controls  all  phases  of  the  problem  of 
service,  safety,  convenience  and  sanitation.  It  is  given  full 
power  to  regulate  switching,  demurrage,  shortage  of  cars, 
weighing,  the  safe  construction  of  roadbeds  and  rolling 
stock  and  every  possible  detail  of  railroad  management 
touching  either  freight  or  passenger  transportation.  It 
orders  the  construction  of  spur  tracks,  the  protection  of 
dangerous  crossings,  the  erection  of  depots  and  even  the 
construction  of  union  depots  if  public  convenience  and 
necessity  demand.  Before  new  lines  of  railroad  can  be 
built  the  promoters  must  obtain  a  certificate  of  public 
convenience  and  necessity  from  the  Commission.  It  con- 
trols the  schedules  of  trains  and  their  connections  at 
junction  points.  It  may  investigate  the  subject  of  wages, 
the  hours   of  labor,   and   prescribe  the  number  of  men 


THE  RAILROAD  AND  UTILITY  LAWS         5 

engaged  in  switching  service  at  any  point.  Under  a  law 
passed  at  the  1913  session  of  the  legislature  it  can  order 
the  joint  use  of  street-car  tracks  in  order  to  facilitate 
the  handling  of  traffic.  The  validity  of  this  law  is  now 
being  challenged  in  the  courts. 

Publicity  is  the  background  of  the  law.  All  the  books 
of  the  railroad  companies  are  thrown  open  to  the  Com- 
mission. State  auditors  are  empowered  to,  and  do,  review 
the  items.  The  railroads  must  file  copies  of  all  contracts 
that  relate  to  transportation.  The  names  and  lists  of  all 
persons  granted  passes,  recipients  of  mileage  books  issued 
at  less  than  cost,  with  a  complete  statement  as  to  why  they 
were  issued,  must  be  filed.  These  are  the  more  salient 
features  of  the  law  aside  from  the  physical  valuation  of  the 
properties.  All  of  the  decisions  and  statistical  tables  show- 
ing financial  earnings  must  be  published.  The  Commis- 
sion's records  are  always  open  for  public  inspection. 

REGULATION    OF    UTILITIES 

In  1907,  two  years  after  the  railroad  law  was  passed, 
the  legislature  extended  the  Commission's  powers  to  the 
public  utilities  of  the  state,  including  the  light,  telephone, 
water,  heating  and  telegraph  companies.  In  1911  toll 
bridges,  and  in  August,  1915,  "jitneys,"  were  brought 
within  the  scope  of  the  Commission 's  powers.  Utility  legis- 
lation also  covers  rates  and  service  both  of  municipal  and 
private  plants. 

Unlike  the  New  York  and  Massachusetts  laws  which 
attack  the  problem  through  the  control  of  future  capitaliza- 
tion, the  Wisconsin  statute  makes  the  physical  valuation 
of  the  properties  the  crux.  The  statute  provides:  "The 
Commission  shall  value  all  the  property  of  every  public 
utility  actually  used  and  useful  for  the  convenience  of 
the  public.     In  making  such  valuation   the   Commission 


6         RAILROADS  AND  PUBLIC  UTILITIES 

may  avail  itself  of  any  information  in  possession  of  the 
state  board  of  assessment. ' ' 

Probably  no  law  on  this  subject  in  any  state  carries  the 
publicity  requirement  as  far  as  does  the  Wisconsin  law. 
This  is  the  safeguard  that  keeps  commissions  from  falling 
under  the  control  of  the  corporations.  The  public,  too, 
is  able  to  judge  when  given  the  facts.  AVith  publication 
of  the  facts  provided  under  this  law  the  ordinary  man 
may  determine  whether  the  profits  of  the  company  and 
its  rates  are  exorbitant. 

No  feature  of  the  law,  aside  from  physical  valuation, 
has  attracted  wider  attention  than  the  uniform  accounting 
provided  for  by  law.  The  accounting  has  been  adjusted 
to  fit  every  size  of  plant  and  every  class  of  utility.  The 
law  further  provides:  "No  public  utility  shall  keep  any 
other  books,  accounts,  papers  or  records  of  the  business 
transacted  than  those  prescribed  or  approved  by  the  Com- 
mission." 

In  order  that  private  initiative  may  not  be  discouraged, 
the  law  provides  that  the  Commission  may  approve  plans 
for  profit  sharing  and  the  use  of  the  sliding  scale  or 
any  other  method  to  encourage  individual  ingenuity  in 
the  reduction  of  rates. 

Additional  protection  is  furnished  the  private  investor. 
The  law  grants  each  utility  company  an  "indeterminate 
permit"  to  do  business.  All  limited  franchises  have  been 
repealed.  The  companies  have  been  given  in  place  thereof 
the  right  to  a  permit  to  do  business  during  good  behavior. 
Under  this  feature,  however,  the  municipality  can  pur- 
chase the  property  at  any  time  on  a  valuation  to  be  fixed 
by  the  Commission.  At  first  this  feature  was  made  op- 
tional with  the  utilities. 

Finally  the  legislature  of  1911  repealed  all  of  the  utility 
franchises  in  the  state  and  granted  in  lieu  thereof,  indeter- 
minate permits.     This  was  possible  under  a  clause  in  the 


THE  RAILROAD  AND  UTILITY  LAWS         7 

Wisconsin  constitution  which  gives  the  legislature  the 
power  to  alter  or  repeal  any  franchise.  The  corporation 
is  given  protection  in  return.  No  competition  will  be 
allowed  an  existing  utility  unless  in  the  judgment  of  the 
Commission  public  convenience  and  necessity  demand  it. 
In  1911  the  law  requiring  physical  connection  of  telephone 
companies  under  Commission  direction  was  passed  and  the 
telephone  non-duplication  law  was  enacted  two  years  later, 
thereby  extending  the  principle  of  regulated  monopoly  to 
all  utilities  except  telegraph  companies. 

Municipal  ownership  is  encouraged.  The  legislature  of 
1907  repealed  the  law  prohibiting  the  construction  of  a 
municipal  plant  in  competition  with  a  private  company. 
Municipalities  may  construct,  purchase  and  own  all  utili- 
ties except  telephones.  Other  existing  utilities  may  be 
purchased  by  municipalities  at  any  time  following  a  favor- 
able vote  of  the  people  at  a  compensation  to  be  fixed  by  the 
Commission.  Right  to  purchase  street  and  interurban  lines 
was  granted  by  the  legislature  in  1913. 

Following  the  principle  that  has  made  the  Wisconsin 
railroad  law  distinctive  when  compared  with  other  states, 
the  utilities  law  provides  that  the  Commission  fix  absolute 
and  not  maximum  rates.  This  is  designed  to  prevent  dis- 
crimination. The  Commission  classifies  the  service  of  each 
utility  and  makes  a  rate  uniform  for  each  class.  This 
difference  in  rate  is  a  discrimination  authorized  by  law. 
It  also  fixes  the  standards  of  service  for  the  several  classes 
of  utilities — the  voltage  of  electricity,  the  heating  quality 
of  gas,  the  pressure  of  water  on  mains,  the  facility  with 
which  telephone  calls  shall  be  answered  by  operators — 
and  enforces  these  standards  through  frequent  inspections. 
It  has  authority  to  order  extensions  of  service  to  districts 
not  already  served. 

Complaints  to  the  Commission  may  be  made  by  any 
person,  firm,  corporation  or  association,  or  by  any  mer- 


8         RAILROADS  AND  PUBLIC  UTILITIES 

cantile,  agricultural  or  manufacturing  society,  or  by  any 
body  politic  or  municipal  organization.  Often  when  the 
Commission  receives  a  complaint  limited  in  scope  it  makes 
a  general  complaint  on  its  own  motion  that  extends  the 
investigation  ipso  facto  over  the  entire  field.  When  ini- 
tiated the  Commission's  motion  becomes  the  same  as  when 
a  regular  complaint  is  made.  To  set  aside  an  order  made 
by  the  Commission,  the  railroad  or  utility  against  which 
it  is  directed  must  prove  its  unreasonableness,  thus  shifting 
the  burden  of  proof  from  the  Commission  to  the  corpora- 
tion. If  any  new  evidence  is  presented  before  the  court 
the  case  is  immediately  remanded  to  the  Commission.  It 
may  then  enter  a  supplemental  order.  This  necessitates 
that  all  facts  be  presented  to  the  Commission  in  the  first 
instance.  On  all  appeals  through  the  circuit  and  supreme 
courts  of  the  state  the  law  specifies  that  precedence  be 
given  these  cases  to  expedite  an  early  termination  of  the 
litigation.  Failure  of  a  railroad  or  a  utility  to  enforce  a 
Commission  order  within  the  period  fixed  by  the  decision, 
unless  restrained  by  the  courts,  is  punished  by  a  fine  of 
from  $100  to  $1,000  for  each  day's  delay.  The  railroad 
law  permits  a  maximum  fine  of  $10,000  a  day. 

In  1911  the  Commission  was  given  authority  to  regulate 
water  powers.  This  law  was  declared  unconstitutional.  An- 
other, broader  in  scope,  was  passed  at  the  1913  session. 

"Every  public  utility  in  the  state,  except  streets,  high- 
ways and  bridges,  is  brought  within  its  jurisdiction,"  says 
Professor  John  R.  Commons.1  "It  becomes  also  a  local 
government  board,  for  it  regulates  towns,  villages  and  cities 
in  their  management  of  these  undertakings.  Its  authority 
is  great  and  far-reaching.  It  employs  experts  and  agents 
and  fixes  their  compensation.  It  enters  into  the  daily  life 
of  the  people  more  than  all  other  agencies  of  government 
combined. ' ' 

1Beview  of  Reviews,  Aug.,  1907,  224. 


CHAPTER  II 

COMMISSION    OKGANIZATION  AND  PROCEDURE 

The  Railroad  Commission  Law  of  Wisconsin  was  en- 
acted in  1905.  It  created  an  appointive  commission  of 
three  members  in  whom  are  reposed  broad  powers.  Dis- 
criminations and  rebates  were  prohibited.  The  books  of 
the  railroad  companies  were  thrown  open.  Governor  La 
Follette  appointed  Professor  B.  H.  Meyer,  now  of  the  Inter- 
state Commerce  Commission,  who  was  succeeded  in  1912 
by  David  Harlowe,  for  many  years  connected  with  the 
traffic  department  of  the  Allis-Chalmers  company  of  Mil- 
waukee; Halford  Erickson,  still  a  member  of  the  Com- 
mission ;  and  John  Barnes,  now  a  justice  of  the  Wisconsin 
Supreme  Court,  who  was  succeeded  in  1907  by  John  H. 
Roemer,  a  Milwaukee  attorney.  Carl  D.  Jackson  succeeded 
Mr.  Roemer,  and  Walter  Alexander  succeeded  Mr.  Har- 
lowe by  appointment  in  1915. 

The  Railroad  Commission  has  under  its  supervision 
properties  valued  roughly  at  half  a  billion  dollars.  The 
forty-eight  intrastate  and  interstate  railroads  were  assessed 
at  $340,242,000  in  1913;  the  sleeping-car  and  equipment 
companies  at  $2,666,000 ;  the  twenty-eight  street  and  inter- 
urban  lines  were  valued  at  $60,945,000;  the  six  express 
companies  at  $807,500 ;  and  the  four  telegraph  companies 
at  $2,025,000.  A  law  passed  in  1907  extended  like  super- 
vision over  utilities.  In  1912  the  643  telephone,  271  elec- 
tric lighting  plants,  53  gas  concerns,  194  water  companies 
and  17  heating  concerns  had  $44,969,856  common  and  pre- 

9 


10       RAILROADS  AND  PUBLIC  UTILITIES 

ferred  stocks  and  $46,893,810.10  outstanding  bonds,  with 
gross  earnings  aggregating  $21,050,777,  and  were  serving 
a  consuming  public  of  666,524.  In  1911  the  legislature 
extended  the  Commission's  authority  over  toll  bridges  and 
water-power  companies  of  the  state.  How  the  Commission 
has  proceeded  in  handling  this  monumental  task  will  be 
detailed  in  later  chapters. 

As  previously  noted  the  law  creating  the  Railroad  Com- 
mission provides  for  the  appointment  by  the  governor  of 
three  commissioners,  each  for  a  term  of  six  years,  one  of 
whom  shall  have  a  knowledge  of  railroad  law,  and  the  other 
two  shall  have  a  general  understanding  of  matters  relating 
to  railroad  transportation.  The  law  further  provides  that 
the  Commission  appoint  a  secretary ;  employ  a  sufficient 
number  of  clerks  and  stenographers  to  perform  the  clerical 
work  of  the  office,  and  such  experts  and  temporary  em- 
ployees as  are  necessary  to  perform  any  services  required. 
At  the  outset  it  became  apparent  that  the  cases  brought 
before  the  Commission  were  chiefly  of  three  classes,  namely, 
those  concerning  rates,  those  involving  service,  and  those 
in  which  legal  questions  arose.  It  was  found  that  efficiency 
could  be  best  maintained  by  having  one  commissioner 
supervise  the  handling  of  cases  of  one  class  only,  a  practice 
which  has  continued  ever  since.  Even  after  the  additional 
duties  of  administering  the  Public  Utility  Law  were  given 
by  the  passage  of  the  act  of  1907,  the  Commission  adhered 
to  this  general  plan  of  division  of  duties. 

As  the  work  of  the  Commission  has  grown,  the  staff  of 
employees  has  necessarily  been  increased.  Soon  after  or- 
ganization it  became  essential  that  the  Commission  have 
an  assistant  secretary  to  aid  the  secretary  in  the  handling 
of  such  matters  as  came  under  his  jurisdiction.  When  the 
legislature  added  to  the  duties  of  the  Commission  the 
administration  of  the  stock  and  bond  law,  it  became  the 
custom  for  the  assistant  secretary  to  make  all  investigations 


THE  RAILROAD  COMMISSION  11 

and  recommendations  pertaining  to  the  stock  and  bond 
cases.  Later  amendments  to  the  stock  and  bond  law  have 
so  increased  the  work  in  connection  with  cases  of  that 
class  that  not  only  does  it  take  the  larger  part  of  his  time, 
but  it  has  been  necessary  to  have  additional  help  to  attend 
to  the  work. 

Each  commissioner  has  a  secretary  who  attends  to  the 
office  routine.  The  secretary  of  the  Commission  is  the 
executive  head  of  all  the  other  employees.  The  staff  under 
his  direction  is  divided  into  four  different  departments, 
namely,  the  general  office  force,  the  statistical,  engineering 
and  tariff  departments. 

The  general  office  staff  includes  the  shorthand  reporters, 
whose  duty  it  is  to  take  and  transcribe  the  records  of 
hearings,  the  filing  clerks,  stenographers,  general  clerks 
and  messengers.  The  secretarial  force  of  this  office  receives 
and  distributes  all  mail,  and  all  letters  sent  out  in  reply 
are  signed  by  the  secretary  in  the  name  of  the  Commis- 
sion. The  work  of  making  digests,  syllabi  and  indexing  is 
done  in  the  general  office. 

The  statistical  work  necessary  for  the  decisions  of  the 
Commission  is  of  such  a  nature  that  it  has  been  found 
advisable  to  divide  the  statistical  staff  into  two  divisions, 
one  of  which  deals  with  the  problems  arising  from  the 
administration  of  the  law  which  gives  the  Commission 
jurisdiction  over  railroads,  express  companies  and  tele- 
graph companies,  and  the  other  handling  work  of  a  similar 
nature  under  the  provisions  of  the  Public  Utility  Law. 
Each  division  is  headed  by  a  statistician.  By  means  of 
this  segregation  the  Commission  is  enabled  to  study  more 
thoroughly  than  would  otherwise  be  practicable  the  peculiar 
problem  of  the  classes  of  business  with  which  each  division 
is  working. 

One  of  the  duties  of  the  railroad  statistical  division  is 
the  supervision  and  tabulation  of  the  reports  of  common 


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THE  RAILROAD  COMMISSION  13 

carriers,  with  the  exception  of  street  and  electric  railways. 
These  last  two  were  included  in  the  provisions  of  the 
original  Railroad  Commission  Law,  but  the  fact  that  many 
of  them  are  operated  in  conjunction  with  power  and  light- 
ing plants  has  led  to  the  diversion  of  the  work  connected 
with  them  to  the  utility  statistical  department.  Every 
carrier  makes  an  annual  detailed  statement  showing  the 
operations,  both  of  the  system  as  a  whole  and  of  the  Wis- 
consin portion,  for  the  year  ending  June  30.  On  Decem- 
ber 31,  each  year,  the  steam  railroads  make  another  report 
which  covers  somewhat  different  ground.  The  railroad 
statistical  division  prepares  the  blank  forms  for  both  of 
these  statements,  supervises  their  preparation  and  checks 
and  tabulates  the  reports  as  they  are  returned.  From 
these  official  statements  and  from  other  sources  the  depart- 
ment prepares  its  tabulations  of  unit  costs  of  operation. 
A  wide  variety  of  units  is  in  use,  probably  the  most  im- 
portant being  the  miles  of  road — locomotive  miles,  train 
miles,  car  miles;  the  number  of  locomotives,  of  freight 
and  passenger  cars ;  the  number  of  passengers ;  the  number 
of  tons  of  freight  carried,  and  the  number  of  ton  and 
passenger  miles  made.  One  of  the  most  significant  func- 
tions of  the  department  is  the  analysis  of  the  costs  of 
operations  together  with  the  operations  to  which  these  costs 
are  related,  so  that  it  may  determine  the  costs  of  the  various 
services  performed.  These  investigations  are  probably  the 
most  important  as  well  as  the  most  extensive  and  complex 
of  the  many  made.  Miscellaneous  data  essential  to  the 
decision  of  cases  is  also  supplied  through  this  department. 
The  Public  Utility  Law  of  19071  provides  that  every 
utility  shall  file  with  the  Commission  at  the  close  of  busi- 
ness on  June  30  each  year  a  balance  sheet  and  such  other 
information  as  the  Commission  shall  prescribe.     Further- 

1 A  recent  amendment  requires  telephone  companies  to  report  their 
condition  at  the  close  of  business  on  Dec.  31. 


14       RAILROADS  AND  PUBLIC  UTILITIES 

more  it  must  show  in  itemized  detail  the  various  ele- 
ments of  cost  per  unit  of  product  or  service.  These 
figures  the  Commission  must  publish  in  its  annual  report. 
Naturally  this  work  of  compilation  and  checking  is  a  por- 
tion  of  the  labors  of  the  utility  statistical  division,  but  the 
department  also  embraces  a  number  of  other  functions 
which  are  mentioned  in  more  detail  in  the  following  pages. 
Some  of  these  are  as  follows: 

I.  Preparation  of  accounting  and  statistical  data  for 
use  in  formal  cases. 

II.  Preparation  of  similar  data  for  informal  cases. 

III.  Accounting  work,  consisting  of  auditing  and  check- 
ing financial  records  and  furnishing  accounting  assistance 
to  utilities.1 

IV.  Keeping  the  files  of  public  utility  rates,  rules  and 
regulations  and  preparing  the  rates  for  publication. 

V.  Determination  of  unit  costs  as  provided  by  law. 

VI.  Collection  and  compilation  of  material  for  reports, 
as  provided  by  law. 

The  engineering  staff  serves  jointly  the  railroad  and 
the  tax  commissions,  and  has  been  organized  with  a  view 
of  serving  to  the  best  advantage  in  the  various  lines  of 
engineering  work  required  by  the  two  commissions.  The 
department  is  in  charge  of  the  chief  engineer,  under  whom 
is  an  assistant  engineer.  Professor  W.  D.  Pence,  recently 
appointed  by  the  Interstate  Commerce  Commission  as  one 
of  a  commission  of  five  to  value  the  railroads  of  the  United 
States,  was  chief  engineer  for  the  Wisconsin  Railroad  Com- 
mission for  several  years  before  his  appointment.  The 
general  office  force  of  the  department  attends  to  the  filing 
and  stenographic  work,  the  blue-printing,  and  cost-keeping 

1  The  third  phase  noted,  that  of  accounting,  is  elaborated  in 
another  chapter. 


THE  RAILROAD  COMMISSION  15 

for  the  department.  One  civil  engineer  inspector  with  a 
corps  of  assistants  handles  the  valuation  of  roadways  and 
roadway  structures  and  makes  situation  surveys  in  con- 
nection with  investigations  of  grade  crossings,  valuation 
and  inspection  of  bridges,  track  elevation  work  and  track 
inspection.  The  mechanical  inspector  and  those  who  assist 
him  make  valuations  of  steam  roads,  rolling  stock  of  steam 
roads,  boilers,  engines,  pumps  and  piping  in  connection 
with  railroad  and  public  utility  plants  and  further  attend 
to  such  special  investigations  as  are  necessary  in  complaints 
against  heating  companies.  The  electrical  equipment  in- 
spector and  his  assistants  bear  the  same  relation  to  electric 
lines  as  does  the  mechanical  inspector  to  the  steam  roads. 
The  electrical  distribution  and  telephone  inspection  group 
handles  the  valuation  of  electrical  distribution  systems  and 
telephone  plants.  In  charge  of  the  water  and  gas  distribu- 
tion is  a  civil  engineer  inspector  who,  with  his  assistants, 
values  gas  and  water  mains,  gas  holders  and  steam 
pipes;  investigates  the  sources  of  water  supply,  and  in 
cooperation  with  the  mechanical  engineer  makes  fire  stream 
tests  and  pressure  surveys  for  determining  the  adequacy 
of  water-works  service.  The  gas  plant  equipment  inspector 
handles  the  valuation  of  gas  plant  equipment  and  various 
gas  engineering  problems.  The  expert  on  light  and  heat 
and  his  immediate  assistants  have  charge  of  the  inspection 
of  the  quality  of  the  service  furnished  by  gas  and  electric 
light  and  telephone  companies.  The  civil  engineer  in- 
spector in  charge  of  valuation  of  land  and  buildings  values 
the  land,  foundations,  buildings,  furniture  and  fixtures. 
The  safety  service  inspector  investigates  railway  service 
and  accidents  and  supervises  the  installation  and  operation 
of  the  interlocking  plants  and  block  signals.  The  passage 
of  what  is  known  as  the  Water  Powers  Act  by  the  legisla- 
ture of  1913  has  necessitated  the  establishment  of  another 
division  of  the  staff  which  handles  the  engineering  phases 


16       RAILROADS  AND  PUBLIC  UTILITIES 

of  the  water-power  problems.  Within  the  past  few  years 
the  Commission  has  found  it  best  to  establish  a  branch 
of  the  engineering  department  in  Milwaukee.  There  have 
arisen  so  many  cases  which  require  almost  constant  attend- 
ance of  members  of  the  engineering  staff  in  that  city  that 
several  men  have  been  permanently  assigned  to  that  office. 
The  tariff  department  has  charge  of  all  schedules  of 
rates  relating  to  railway  and  express  companies.  On  May 
17,  1911,  the  legislature  enacted  a  law  providing  that  no 
change  in  rates  or  classification  shall  be  made  until  such 
change  has  met  the  approval  of  the  Commission.  Applica- 
tions for  amendments  to  utility  rates,  or  for  new  rate 
schedules,  are  investigated  by  the  Commission.  If  they 
constitute  increases  a  formal  case  is  required.  The  number 
of  such  applications  examined  each  year  is  as  follows: 

Applications  for  Amendments  to  Rates  Investigated 


Year  Ended 

Railroads 

Utilities 

Total 

June  30,  1912* 

1,006 

837 

69 

278 

1,075 
1,115 

June  30,  1913 

*  Records  of  these  applications  not  tabulated  prior  to  1912. 


The  denial  of  most  of  these  applications,  which  would 
be  put  into  effect  immediately  if  there  were  no  commission, 
saves  the  public  many  millions  of  dollars  a  year.  Chapter 
59  of  the  Laws  of  1913  provides  that  any  person  may  send 
or  bring  to  the  Commission  any  railroad  or  express  expense 
bill  or  receipt,  and  have  it  examined  for  correctness  as  to 
weights,  rates  and  charges,  and  if  after  investigation  the 
Commission  shall  find  any  weight,  rate  or  charges  incor- 
rect, it  shall  order  the  company  in  error  to  refund  to  the 
person  aggrieved.    Both  of  these  statutes  have  materially 


THE  RAILROAD  COMMISSION 


17 


increased  the  labors  of  the  tariff  department.  All  the  rates 
of  public  utilities  are  kept  by  a  rate  clerk  under  the  direc- 
tion of  the  utility  department  statistician. 

Some  years  ago  the  regents  of  the  University  of  Wiscon- 
sin established  two  "working  fellowships,"  providing  that 
two  graduate  students  of  the  department  of  economics 
should  devote  half  their  time  to  study  and  half  to  the 
work  of  the  Commission.  These  students  are  assigned  to 
the  different  departments  as  their  services  are  needed  and 
thus  come  in  touch  with  the  whole  work  of  the  Commis- 
sion. 

From  the  time  of  its  organization  to  June  30,  1913,  the 
Railroad  Commission  of  Wisconsin  had  considered  2,511 
formal  and  5,237  informal  cases.  While  the  larger  part 
of  these  were  complaints  brought  before  it  by  the  people 
of  the  state,  they  by  no  means  constitute  all  the  cases 
considered  by  this  Commission.  Conditions  are  often 
found  which  lead  to  an  investigation  by  the  Commission 
on  its  own  motion.  This  is  especially  true  of  the  cases 
relating  to  railroad  service  and  crossings. 

Perhaps  the  most  important  work  of  the  Commission 
is  hearing  and  deciding  the  various  cases  which  arise  under 
its  jurisdiction  and  carrying  its  decisions  through  appeals 


Cases  Before  or  Involving 

the  Commission 

Railways 

Utilities 

Conven- 

Suits 

Total 

Year 

Stocks 
and 

ience 
and  ne- 

against 
Com- 

exclusive 
of  in- 

Grand 

ended 

total 

June  30 

Formal 

Informal 

Formal 

Informal 

bonds 

cessity 

mission 

formal 

1906 . . . 

57 

350 

57 

407 

1907 . . . 

107 

630 

107 

737 

1908 . . . 

121 

673 

83 

246 

39 

14 

4 

271 

1,180 

1909 . . . 

175 

642 

67 

496 

45 

12 

3 

302 

1,440 

1910... 

157 

432 

57 

144 

58 

16 

2 

290 

866 

1911... 

167 

285 

98 

87 

54 

12 

5 

336 

708 

1912... 

282 

402 

109 

139 

143 

10 

10 

554 

1,095 

1913... 

268 

502 

112 

209 

196 

12 

6 

594 

1,305 

1914... 

265 

506 

154 

300 

168 

9 

20 

616 

1,322 

Total 

1,599 

5,402 

680 

1,621 

703 

85 

50 

3,127 

8,760 

18       RAILROADS  AND  PUBLIC  UTILITIES 

to  the  courts.  The  preceding  table  lists  the  cases  chrono- 
logically as  commenced. 

Many  other  complaints,  besides  those  resulting  in  these 
cases,  are  settled  in  conferences  or  by  correspondence,  with- 
out action  between  the  parties.  The  Commission's  daily 
mail  averages  three  hundred  letters.  Complaints  and  peti- 
tions which  have  to  be  passed  upon  number  more  than 
twenty-five  for  every  working  day  of  the  year. 

Of  all  the  cases  brought  before  the  Commission  thus  far 
the  records  show  that  between  90  and  95  per  cent  are 
decided  in  favor  of  the  public. 

It  is  well  in  this  connection  to  trace  the  procedure  in 
a  formal  ease  before  the  Commission.  When  complaint  is 
brought  against  a  public  service  corporation,  the  secretary 
sends  to  the  respondent  company  a  copy  of  such  com- 
plaint, and  notice  that  investigation  has  been  started. 
After  ten  days,  a  time  and  place  of  hearing  are  set.  The 
complainant  may  be  represented  by  counsel  or  may  appear 
in  person,  or,  if  he  so  please,  may  submit  his  case  by  brief. 
Exhibits  are  submitted  at  the  hearing  by  both  parties. 
If  the  matter  involves  rates,  it  is  generally  heard  by  the 
commissioner  whose  duty  it  is  to  take  charge  of  such  cases. 
The  matter  is  then  taken  up  by  the  engineering  department 
which  makes  a  valuation  of  the  plant.  These  valuations 
are  made  for  rate  purposes,  for  municipal  purchase,  stock 
and  bond  cases  and,  in  some  instances,  to  furnish  a  basis 
for  opening  accounts.  When  the  valuation  is  completed 
the  facts  are  turned  over  to  the  statistical  department.  A 
careful  analysis  is  there  made  of  the  financial  and  statistical 
data  submitted  at  the  hearing,  and  comparisons  made  with 
information  from  other  sources.  It  is  often  necessary  to 
obtain  more  detailed  information  before  the  proper  com- 
parisons can  be  made.  An  investigation  of  statistics  of 
operation  and  sales,  including  statistics  of  load  and  output, 
of  consumption,  development  of  business  and  saturation  of 


THE  RAILROAD  COMMISSION  19 

territory,  the  percentage  of  consumers  and  sales  metered, 
the  product  lost  and  unaccounted  for,  and  the  distribution 
of  sales,  is  thoroughly  gone  into,  as  is  the  determination 
of  the  basis  of  return  and  of  normal  operating  expenses. 
The  cost  curve  is  then  drawn  and  submitted  and  from 
this  the  Commission  is  enabled  to  formulate  a  schedule  of 
rates. 

The  procedure  in  a  railroad  or  express  case  is  very 
similar.  It  may  be  noted,  however,  that  the  railroad  valua- 
tions are  made  from  year  to  year,  while  the  valuations  of 
public  utility  plants  are  made  only  when  required. 

When  the  case  before  the  Commission  involves  service, 
station  facilities,  grade  crossing  or  track  elevation  or  de- 
pression, the  commissioner  who  handles  such  cases  holds 
the  hearing  at  or  near  the  place  in  question  and  very  often 
makes  personal  investigation  of  the  situation.  If  this  plan 
is  impractical  a  member  of  the  engineering  staff  is  detailed 
to  make  a  thorough  study  of  the  problem  and  submit  a 
report. 

If  no  effective  date  for  an  order  is  fixed  by  the  Com- 
mission, the  law,  under  the  terms  of  the  statute,  becomes 
effective  within  twenty  days.  Generally,  however,  the  or- 
der gives  respondent  a  certain  number  of  days  to  comply 
with  the  order.  The  opinions  of  the  Commission  are  pub- 
lished separately,  after  an  order  is  made,  and  later  gathered 
into  bound  volumes,  of  which  thirteen  have  already  been 
issued. 

There  are  complex  problems  in  many  cases  which  re- 
quire the  compilation  of  additional  data  and  delay  decision 
in  the  matter.  Expert  advice  is  also  often  essential,  espe- 
cially in  the  engineering  problems  which  arise.  Fully  half 
of  the  employees  of  the  Commission  are  graduates  of  the 
University  of  Wisconsin.  Hon.  Max  Thelen,  now  a  member 
of  the  California  Commission,  after  making  a  study  of  the 
different  state  commissions,  recently  said  of  the  Wisconsin 


20       RAILROADS  AND  PUBLIC  UTILITIES 

Commission  and  its  relation  to  the  University  of  Wis- 
consin : x 

This  relation  is  of  very  great  assistance  both  to  the  University 
and  to  the  Commission.  It  helps  the  University,  because  quite 
a  number  of  her  instructors  are  enabled  to  do  practical  work  arid 
to  bring  to  their  classes  the  point  of  view  of  a  practical  man. 
The  University  is  also  very  materially  aided  because  the  people 
of  the  state  see  that  it  is  helping  them  to  solve  some  of  their  most 
important  practical  problems,  and  for  that  reason  gives  her  gen- 
erous support.  The  arrangement  is  also  of  very  material  assist- 
ance to  the  Commission.  It  gives  to  the  Commission  unpreju- 
diced men  of  scholarliness  and  thoroughness  and  high  ideals  of 
public  service.  I  am  convinced  that  the  Wisconsin  Commission 
could  not  have  attained  its  present  high  stage  of  efficiency  if  it 
had  not  been  for  its  close  association  with  the  State  University. 

1  Thelen,  Report  on  Leading  Railroad  and  Public  Service  Com- 
missions to  California  Railroad  Commission,  1911,  42. 


CHAPTER  III 
PHYSICAL  VALUATION  OF  RAILROADS  AND  UTILITIES 

Physical  valuation  of  railroads  and  public  utility  prop- 
erties as  a  basis  for  determining  service  requirements  and 
rate  schedules  is  as  essential  in  the  plan  of  state  regulation 
of  these  enterprises,  as  an  inventory  cost  of  each  grade  of 
article  in  a  retail  store  is  necessary  to  the  storekeeper 
before  placing  his  goods  upon  the  market.  In  the  past 
twenty  years  a  new  economy  has  gained  foothold.  The 
tendency  is  not  to  base  charges  for  service  on  what  the 
traffic  will  bear,  but  upon  the  cost  per  unit  of  service. 
Physical  valuation  is  an  important  factor  in  the  establish- 
ment of  peaceable  relations  between  the  public  and  the 
utilities.  When  combined  with  the  proper  determination 
of  operating  expenses,  it  will  aid  in  giving  the  public  the 
true  cost  facts. 

Up  to  1903  the  railroads  of  Wisconsin  were  not  valued 
for  taxation  purposes  as  other  properties.  They  paid  taxes 
in  the  form  of  license  fees  upon  their  gross  earnings.  A 
report  of  the  state  Tax  Commission  showed  that  the  rail- 
roads paid  only  .53  per  cent  of  their  market  value  (gauged 
on  average  value  of  stocks  and  bonds)  in  taxes,  while  the 
farmers,  manufacturers,  home  owners  and  others  paid  1.19 
per  cent,  or  over  twice  as  much.  Such  a  disclosure  finally 
resulted,  after  a  bitter  fight,  in  the  passage  of  the  ad 
valorem  taxation  law, x  which  provided  for  the  physical 

1  La  Follette,  Autobiography,  243 ;  Report  of  Wisconsin  Tax  Com- 
mission, 1907,  269-293. 

21 


22       RAILROADS  AND  PUBLIC  UTILITIES 

valuation  of  the  railroads  of  the  state,  and  the  taxation  of 
them  on  the  same  basis  as  general  property.  The  imme- 
diate effect  was  to  increase  railroad  taxes  more  than 
$600,000  annually.1  Physical  valuation  was  made  the 
foundation  stone  of  the  Railroad  Commission  Law  enacted 
two  years  later.  The  valuation  theory  has  since  been  ex- 
tended, both  for  taxation  and  rate-making  purposes,  to  the 
other  public  utilities  of  the  state. 

The  Railroad  Commission  is  directed  by  law  2  to  ascer- 
tain the  amount  of  money  expended  in  the  construction 
and  equipment  of  every  railroad,  the  cost  of  the  right  of 
way  and  "the  amount  it  would  require  to  secure  the  right 
of  way,  construct  the  roadbed,  tracks,  depots  and  other 
facilities  for  transportation,  and  to  replace  all  of  the  phys- 
ical properties  belonging  to  the  railroad."  It  must  also 
ascertain  the  amount  of  outstanding  bonds,  when  issued, 
the  price  paid,  and  the  amounts  paid  in  securing  fran- 
chises. All  similar  information  in  possession  of  the  state 
Tax  Commission  is  placed  at  the  disposal  of  the  Railroad 
Commission. 

The  first  railroad  valuations  in  1903  were  made  by 
Professor  W.  D.  Taylor  and  an  engineering  staff  under 
the  direction  of  the  state  Tax  Commission.  These  figures 
have  since  been  revised  annually.  In  this  work  the  plan 
followed  was  similar  to  that  adopted  by  Michigan  and 
as  outlined  by  Professor  Mortimer  E.  Cooley  of  Ann  Ar- 
bor.3 Since  1905  the  engineering  staff  has  made  these 
valuations  jointly  for  the  Tax  and  Railroad  commissions. 

The  physical  valuation  of  the  railroads  of  the  state 
includes  an  inventory  of  each  railroad's  property  to  the 
minutest  detail,  even  to  the  bolts  and  paint,  and  a  deter- 
mination of  cost  of  reproducing  the  same  railroad  system 

'  Keport  of  Wisconsin  Tax  Commission,  1909,  83. 

2  Revised  Statutes  for  1913,  sec.  1797-20. 

3  Report  of  Tax  Commission,  1907,  269. 


PHYSICAL  VALUATION  23 

in  its  present  condition.  The  cost  of  reproduction  is 
assumed  to  be  what  it  would  cost  to  reproduce  the  road 
at  present  prices.  In  order  to  get  normal  present  prices 
the  average  prices  for  five  years  are  obtained.1  The  cost 
of  reproduction  in  present  condition  is  the  cost  of  repro- 
duction new  less  the  amount  of  accrued  depreciation.  The 
final  appraisal  sheets  for  each  road  contain  thirty-seven 
items  of  physical  valuation,  of  which  the  more  important 
are:  right  of  way,  station  grounds,  real  estate,  grading, 
tunnels,  bridges,  ties,  rails,  track  fastenings,  frogs,  switches 
and  crossings,  ballast,  track-laying  and  surfacing,  fencing, 
crossings,  cattle  guards  and  signs,  interlocking  and  signal 
apparatus,  telegraph  and  telephone  lines,  station  buildings 
and  fixtures,  shops  and  roundhouses,  tools,  water  stations, 
fuel  stations,  grain  elevators,  warehouses,  docks  and 
wharves,  miscellaneous  structures,  engineering  superinten- 
dence and  legal  expenses  at  4.5  per  cent  of  the  cost  of 
reproduction  new  of  all  of  the  items  before  mentioned — 
locomotives,  passenger  equipment,  ferries  and  steamships, 
electric  plants,  shop  equipment  and  tools,  freight  on  con- 
struction material,  interest  during  construction  and  stores 
and  supplies. 

These  items  are  divided  and  subdivided  and  given  in 
such  detail  that  the  Railroad  Commission  has  before  it 
fairly  reliable  information  to  guide  it  in  making  rates 
upon  a  fair  value  of  the  property.  How  this  valuation 
is  used  preparatory  to  making  rates  is  probably  best  out- 
lined in  the  Buell  case  which  was  an  application  for  a 
reduction  of  passenger  fares.  This  opinion  has  been  used 
as  an  economic  textbook  for  study  in  some  of  the  college 
classes  of  the  country  and  the  basis  laid  down  in  it  was 
followed  by  the  federal  post-office  authorities  when  they 
recently  inquired  into  the  cost  of  handling  the  mails  on 
passenger  trains. 

1Keport  of  Tax  Commission,  1912,  13. 


24       RAILROADS  AND  PUBLIC  UTILITIES 

Discussing  the  question  of  a  railroad  valuation  for  rate- 
making  purposes  the  Commission  in  the  Buell  case  said : 1 

What  constitutes  a  fair  valuation  of  the  plant"?  Is  it  the 
original  cost  of  construction,  the  amount  at  which  it  is  capitalized, 
the  cost  of  reconstruction  new,  or  the  cost  of  reproduction  up  to 
its  existing  condition?  The  original  cost  of  construction  is  an 
item  that  cannot  generally  be  ascertained  except  for  relatively 
new  roads.  Most  of  the  roads  were  built  by  construction  com- 
panies whose  records  are  not  in  existence,  and  then  turned  over 
to  some  company  at  a  different  value  than  the  original  cost. 
Many  of  the  roads  are  undergoing  constant  improvements ;  in  fact, 
some  of  them  have  been  almost  entirely  rebuilt  since  the  time 
of  their  first  construction.  The  original  cost  as  well  as  the  amount 
that  has  been  expended  upon  the  plant  to  any  given  date,  exclu- 
sive of  the  maintenance,  are  items  that  for  these  and  other  rea- 
sons cannot  be  obtained,  and  which  would  probably  be  of  little 
value  if  they  could  be  had. 

The  capitalization  of  the  roads,  or  the  bonds  and  stocks  issued 
by  them,  in  most  cases  falls  short  of  being  a  fair  index  to  a 
reasonable  valuation.  The  main  reason  for  this  is  found  in  the 
manner  in  which  these  securities  are  issued.  The  railroads  are 
often  both  constructed  and  equipped  by  the  proceeds  obtained 
from  the  sale  of  their  bonds,  while  the  stock  is  often  thrown  in  as 
a  bonus.  Again,  bonds  and  stocks  are  often  issued  for  other 
purposes  than  construction.  Many  roads,  for  instance,  issue 
securities  for  the  purpose  of  acquiring  an  interest  in  other  roads, 
or  in  other  property  than  that  which  can  properly  be  considered 
as  a  part  of  their  respective  plants.  At  times  the  securities  are 
sold  at  a  discount  and  the  bonds  alone  may  often  amount  to  more 
than  the  entire  cost  of  the  road.  For  these  and  other  reasons 
the  capitalization  is  subject  to  great  variations.  In  some  cases 
it  may  greatly  exceed  the  amount  actually  invested,  or  what  might 
be  a  fair  valuation  of  the  property.  In  other  cases,  again,  it 
may  correspond  quite  closely  to  the  true  value  of  the  plant,  or  it 
may  even  amount  to  less  than  this  value.     From  these  facts  it 

1  Buell  v.  Chicago,  Milwaukee,  and  St.  Paul  Railway  Company.  1 
Wisconsin  Kailroad  Commission  Eeport,  478  et  seq. 


PHYSICAL  VALUATION  25 

seems  clear  that  the  bonds  and  stocks  which  are  outstanding  may 
not  represent  what  the  roads  are  reasonably  worth  and  the 
amount  upon  which  they  are  entitled  to  a  fair  return. 

The  cost  of  reproduction  has  been  suggested  as  the  valuation 
that  might  be  fair  to  all  concerned.  This  cost  includes  the  value 
of  the  right  of  way,  yards,  and  terminals  at  two  and  one-half 
times  the  prices  of  adjacent  real  estate,  or  at  some  other  price 
ratio.  It  also  includes  the  cost  of  buildings  and  structures  of 
all  kinds,  new,  if  constructed  at  current  prices  of  material  and 
labor.  It  further  includes  the  labor  and  material  at  current  rates 
for  the  construction  of  the  road  and  its  equipments,  together  with 
engineering,  superintendence,  legal  expenses,  cost  of  organiza- 
tion, cost  of  material  on  hand,  freight  charges  on  the  material 
used,  etc.  In  short,  it  includes  every  item  of  expense  which 
would  be  involved  in  building  the  road  to-day,  including  the  in- 
terest on  the  investment  during  the  construction  period. 

The  cost  of  rebuilding  the  road  in  question  in  this  state  to-day 
would  no  doubt  be  considerably  greater  than  it  was  at  the  time 
when  the  greater  part  of  it  was  constructed.  .  .  .  The  construc- 
tion of  a  considerable  portion  of  the  road  was  subsidized  by  land 
grants  and  bonuses  of  various  kinds.  Whether  under  these  con- 
ditions the  cost  of  reproduction  new  to-day  can  be  considered  a 
fair  basis  of  the  valuation  of  the  property  for  the  purposes  in 
view,  may  perhaps  be  questioned.  On  the  other  hand,  it  can 
perhaps  be  said  that  the  owners  of  the  railroad  property  are  en- 
titled to  any  increase  in  the  value  of  their  property  that  may  ac- 
crue from  the  progress  of  the  territory  in  which  it  lies,  and 
that  they  have  as  much  right  to  the  natural  increments  in  the 
physical  value  of  their  property  as  the  owners  of  any  other 
property. 

The  cost  of  reproduction  new,  reduced  by  depreciation  in  the 
property  caused  by  use,  has  also  been  suggested  as  a  basis  for 
valuation.  The  value  obtained  upon  this  basis  can  be  defined  as 
the  value  under  existing  conditions.  In  this  case  the  costs  of 
the  right  of  way  and  grading,  and  of  the  material  on  hand  are, 
of  course,  the  same  as  under  the  cost  of  reproduction  new,  but 
practically  all  the  other  items  are  lower.  This  value  represents 
the  physical  property  used  for  the  purposes  of  transportation  at 


26       RAILROADS  AND  PUBLIC  UTILITIES 

the  time  of  the  appraisal.  On  the  face  of  it,  it  would  appear  to 
be  most  equitable  of  all  the  valuations  upon  which  the  interest 
should  be  figured.  Whether  this  is  really  so  depends  upon  many 
other  factors  such  as  the  provisions  which  have  been  made  for 
depreciation  and  how  cost  of  reproduction  new  compares  with  the 
original  cost  of  construction  where  this  can  be  ascertained.  De- 
preciation is  as  a  rule  covered  by  the  allowance  which  is  regu- 
larly made  for  maintenance 

If  a  single  basis  of  valuation  is  to  be  adopted  the  cost  of  re- 
production, less  depreciation,  is  the  lowest  that  might  be  figured. 
The  stock  and  bond  valuation  calculated  on  the  market  values  of 
the  securities  would  be  the  highest.  The  first  basis  leaves  out  of 
account  the  value  of  the  plant  as  a  going  concern,  the  business 
it  has  built  up  and  the  business  connections  it  has  made.  The 
second  basis  may  be  the  direct  result  of  excessive  rates.  While 
the  cost  of  reproducing,  new,  the  property  of  the  railway  com- 
pany under  consideration  in  Wisconsin  as  found  by  the  tax  com- 
mission, in  1905,  was  $62,970,000.00,  the  property  was  actually 
assessed  by  said  commission  in  that  year  for  $73,700,000.00. 
What  may  be  a  fair  value  in  a  given  year  for  taxation  purposes 
is  not  necessarily  a  fair  one  for  rate-making  purposes.  The 
franchise  value  or  the  earning  power  of  a  railway  property  may 
be  and  often  is  enhanced  by  the  imposition  of  excessive  rates.— — 

But  in  so  far  as  the  courts  have  laid  down  any  rule  for  our 
guidance,  we  are  precluded  from  adopting  any  single  basis  of 
valuation,  to  the  exclusion  of  other  bases  or  considerations.  In 
the  Smythe-Ames  case,  cited  supra,  the  United  States  Supreme 
Court  says  that  in  order  to  ascertain  a  correct  valuation  the 
original  cost  of  construction,  when  it  can  be  determined,  the 
amount  expended  in  permanent  improvements,  the  amount  and 
market  value  of  the  stock  and  bonds,  the  present  as  compared 
with  the  original  cost  of  construction,  the  probable  earning  ca- 
pacity of  the  property  under  lawfully  prescribed  rates  and  the 
sum  required  to  meet  operating  expenses,  all  are  matters  for 
consideration  and  are  to  be  given  such  weight  as  may  be  just 
and  right  in  each  case.  The  court  says  that  it  is  even  probable 
that  other  considerations  should  be  taken  into  account  in  deter- 
mining the  question. 


PHYSICAL  VALUATION  27 

"We  have  carefully  considered  this  matter  of  valuation  and  the 
various  elements  that  should  be  taken  into  account  as  decided  by 
the  court.  Our  conclusion  is  so  near  to  the  cost  of  reproduction 
new,  that  we  have  concluded  to  adopt  that  valuation,  not  because 
it  happens  to  be  made  on  any  particular  basis,  but  because  it  is 
equivalent  to  a  composite  value  arrived  at  after  taking  into  ac- 
count the  various  elements  suggested  by  the  court. 

VALUATION    OF    PUBLIC    UTILITIES 

Practically  the  same  methods  as  are  employed  in  the 
valuation  of  railroads  are  used  by  the  Commission  in 
valuing  public  utilities.  The  law  requires  the  Commission 
to  value  ' '  all  of  the  property  of  every  utility  actually  used 
and  useful  for  the  convenience  of  the  public."  Considering 
every  phase  of  the  law,  what  is  desired  is  a  "fair  valua- 
tion." The  original  cost  of  construction,  the  cost  of  repro- 
duction new,  the  cost  of  reproduction  less  depreciation, 
financial  statements  detailing  revenues,  operating  expenses 
and  capitalization,  are  considered.  All  of  these  costs  must 
be  carefully  studied,  with  special  reference  to  local  condi- 
tions, in  fixing  the  valuation.  Neither  the  "market  value" 
nor  the  "capitalized  value"  of  a  public  utility  furnishes 
a  safe  foundation  for  rate-making.  Such  valuations  may 
be  predicated  on  excessive  rates  which  are  themselves  in 
dispute.1  The  same  objection  holds  true  when  the  valua- 
tion is  based  on  a  capitalization  of  net  earnings. 

The  first  step  in  the  process  of  valuation  is  to  secure  a 
complete  inventory  of  the  plant.  The  original  cost  should 
then  be  found  from  an  examination  of  the  books  and 
records  of  the  company.  Many  difficulties  have  been  en- 
countered by  the  investigators  in  this  field.  In  some  of 
the  older  plants  the  records  have  been  lost  or  destroyed  2 

1HiU  et  al.  v.  Antigo  Water  Co.,  1909,  3  W.  E.  C.  E.,  722,  1,025. 

2  State  Journal  Printing  Co.  et  al.  v.  Madison  Gas  $•  Electric  Co., 
1910,  4  W.  E,  C.  E.,  557-558,  933;  City  of  Milwaukee  v.  T.  M.  E.  B. 
4r  L.  Co.,  1913,  10  W.  E.  C.  E.,  1,  84,  872. 


28       RAILROADS  AND  PUBLIC  UTILITIES 

and  those  who  participated  in  the  early  operations  of  the 
company  can  furnish  little  information  due  to  the  lapse  of 
time.  Chairman  John  H.  Roemer,  of  the  Railroad  Commis- 
sion of  "Wisconsin,  in  an  address  before  the  Southern  Gas 
Convention,  at  Mobile,  Alabama,  April  23,  1914,  said  that 
"in  numerous  cases  of  appraisement,  approximating  one 
hundred  and  fifty,  there  were  few  in  which  the  financial 
and  engineering  records  of  the  plant  from  its  inception 
were  in  existence  and  available.  In  most  all  cases  it  was 
necessary  to  construct  a  history  of  the  plant  from  such 
isolated  records  as  could  be  found  and  such  facts  and 
traditions  as  the  memory  of  those  living  could  furnish 
and  principally  from  comparative  data  with  respect  to 
similar  plants."  The  experience  of  the  Commission  has 
shown  that  the  difference  between  an  original  cost  valua- 
tion based  on  a  complete  history  and  a  cost  obtained  for 
the  same  plant  constructed  according  to  comparative  data, 
is  almost  nil.  The  original  records  can  seldom  be  relied 
upon  without  the  closest  scrutiny.  Often  it  is  discovered 
that  items  have  been  raised  to  an  arbitrary  level  to  offset 
or  furnish  a  basis  for  stock  issues.  Items  that  should  be 
charged  to  operating  expenses  are  found  in  the  construc- 
tion account.    All  these  errors  must  be  eliminated. 

This  value,  again,  may  be  different  for  a  plant  which 
has  not  been  constructed  at  one  time,  but  by  piecemeal 
depending  upon  the  needs  of  the  population  to  be  served. 
But  as  a  rule  such  extensions  cannot  be  urged  as  more 
costly.  After  much  investigation  the  Commission  in  a 
leading  case  said  : 1 

While  there  are  conditions  that  tend  to  increase  the  cost  un- 
der piecemeal  construction,  there  also  appear  to  be  certain  fac- 
tors which  may  have  the  opposite  effect.  Extensions  to  plants 
are  often  of  such  nature  that  their  cost  during  the  construction 

1  State  Journal  et  al.  cit.  supra.,  549,  931. 


PHYSICAL  VALUATION  29 

period  is  met  out  of  the  current  receipts  or  funds  on  hand  in  such 
a  way  that  little  or  nothing  in  the  way  of  interest  charges  is  in 
reality  incurred  until  the  extensions  are  in  operation  and  financed 
in  the  usual  manner.  Again  the  planning  and  supervision  of  the 
work  of  such  extensions  is  often,  if  not  always,  performed  by 
the  regular  officers  and  employees  of  the  company  without  any 
increase  in  the  salary  or  wages.  The  entire  amount  of  such  su- 
pervisory cost  is  usually  charged  to  the  operating  expenses,  and 
this  tends  materially  to  reduce  the  cost  of  engineering  and  super- 
vision of  these  extensions.  These  and  similar  economies,  often 
practicable  under  the  conditions  described,  are  not  without  sig- 
nificance in  passing  upon  the  cost  of  piecemeal  construction  and 
may  go  far  in  offsetting  many  of  the  factors  which  usually  make 
piecemeal  construction  relatively  the  more  costly. 

When  all  of  these  book  facts  have  been  gathered  and 
tested,  among  the  more  important  cost  items  to  be  found 
will  be :  land,  labor,  materials,  cost  of  promotion,  bond 
discounts,  cost  of  engineering  services,  legal  advice,  interest 
on  capital  during  construction,  taxes,  insurance  and  gen- 
eral expenses  during  the  construction  period  and  cost  of 
contingencies  that  arise  during  the  process  of  construction. 
The  final  result  obtained  from  collecting  these  items  will 
be  the  original  cost  of  the  plant. 

The  original  cost  value  thus  obtained  does  not  repre- 
sent the  present  value  of  the  properties.  From  the  day 
that  the  plant  was  completed  it  began  to  depreciate  in 
value.  Obsolescence,  age  and  inadequacy  make  the  parts 
less  valuable  when  appraised  than  when  new.  As  this 
depreciation  is  constantly  going  on  a  part  of  the  operating 
income  should  be  set  aside  annually  that  the  plant  may  be 
replaced  when  it  becomes  useless.  Sound  as  this  business 
policy  seems,  it  was  not  generally  adopted  by  the  utilities 
until  after  the  enactment  of  the  Public  Utility  Law.  The 
aim  in  the  establishment  of  the  depreciation  fund  is  to  keep 
the  original  investment  intact.     A  system  of  uniform  ac- 


30       RAILROADS  AND  PUBLIC  UTILITIES 

counting,  and  plans  for  depreciation  allowances,  described 
in  later  chapters,  prescribe  the  limitations  upon  the  use  of 
the  depreciation  charges  and  thus  prevent  the  use  of  the 
fund  for  other  purposes.  To  obtain  the  value  of  the  plant 
at  the  time  of  the  appraisal  it  is  necessary  to  determine  the 
amount  of  depreciation1  and  deduct  the  same  from  the 
original  cost. 

Next  the  cost  of  reproduction  of  the  plant  is  ascer- 
tained. With  a  complete  inventory  of  the  properties  used 
and  useful  to  the  utility  and  a  suitable  price  per  unit  for 
each  piece  of  property  determined,  the  result  will  be  the 
cost  of  reproduction  of  the  plant.  To  derive  this  cost 
requires  a  great  deal  of  engineering  work  and  special  skill. 
The  prices  used  2  in  computing  the  reproduction  cost  de- 
mand the  closest  study  to  eliminate  abnormalities  and  to 
prevent  duplications.  Usually  average  prices  for  five  years 
are  applied  in  computing  the  valuation.  In  determining 
the  cost  of  reproduction  new,  the  Commission  makes  an 
allowance  of  12  per  cent  on  the  cost  of  the  physical  prop- 
erty to  cover  such  items  as  interest  during  construction, 
engineering,  expenses  for  legal  work,  organization,  casualty 
insurance  and  contingencies.3  In  the  construction  of  a 
municipal  plant  a  10  per  cent  allowance  has  been  found 
sufficient,4  Such  allowances  are  technically  known  as 
"overhead  charges." 

The  propriety  of  including  "overhead  charges"  in  an 
estimate  of  the  cost  of  reproduction  new  of  the  plant  has 
never  been  seriously  questioned.      Engineers,  economists 


1  For  an  elaborate  discussion  of  ' '  Depreciation, ' '  with  statistical 
life  tables,  see  Commissioner  Eriekson  's  address  before  the  Conven- 
tion of  Central  Water  Works  Association,  Detroit,  Mich.,  Sept.  25, 
1912. 

2  Hill  et  al.  op.  cit.  638-640,  1,026. 

3  State  Journal  et  al.  op.  cit.  540-546;  City  of  Sheboygan  v.  She- 
boygan Saihcay  <f  Electric  Co.,  1911,  6  W.  K.  C.  E.,  360,^891. 

iDick  et  al,  v,  Madison  Water  Commission,  op.  cit..  917, 


PHYSICAL  VALUATION  31 

and  operators  all  agree  that  these  extra  costs  exist,  the 
only  question  being  the  amount  that  should  be  allowed 
in  each  case.  This  will,  of  course,  depend  upon  local  con- 
ditions. 

Overhead  charges,  according  to  one  author,1  may  be 
classified  under  six  heads:  (1)  engineering  and  superin- 
tendence; (2)  contingencies;  (3)  contractor's  profit;  (4) 
interest  during  construction;  (5)  legal  and  general  ex- 
penses, company  organization,  taxes  and  insurance ;  and 
(6)  promotion. 

Of  these  extra  costs  contractor's  profit  is  often  included 
in  the  unit  prices.  At  times,  too,  other  of  the  costs  enu- 
merated may  be  included  in  unit  prices.  The  important 
point  is  that  when  these  costs  are  included  in  unit  prices 
they  should  not  be  again  included  under  "overhead 
charges. ' ' 

Separate  allowances  are  often  made  for  "bond  dis- 
counts" and  "working  capital."  Bond  discounts  have 
been  included  in  valuations  on  the  theory  that  they  repre- 
sent the  cost  of  getting  capital.  Bond  discounts  are 
usually  composed  of  two  items:  brokerage  and  discounts 
proper.  Both  items  represent  payments  for  the  use  of 
money  and  may  therefore  be  regarded  as  deferred  interest. 
Working  capital  usually  includes  stores  and  supplies  on 
hand  and  funds  required  to  bridge  the  credit  period  be- 
tween outlay  and  repayment.  It  therefore  represents  in- 
vestment as  much  as  do  expenditures  made  for  plant. 

For  land  actually  used  and  useful  to  the  utility  in 
conducting  its  business,  even  though  such  land  may  have 
been  a  gift  to  the  utility,  under  the  terms  of  the  law 
requiring  a  fair  valuation,  the  Commission  holds  that  it 
must  be  included  in  the  valuation  at  a  price  computed  for 
like  prices  of  contiguous  property,  or  at  its  original  cost 

1  E.  H.  Whitten,  ' '  Valuation  of  Public  Service  Companies, ' '  XII, 
21C. 


32       RAILROADS  AND  PUBLIC  UTILITIES 

plus  the  increment  in  value  since.1  The  reproduction  value 
is  usually  the  most  important  factor  2  in  determining  the 
valuation  of  the  physical  property  of  the  plant  for  rate- 
making  purposes.  The  law  specifically  directs  that  the 
cost  of  reproduction  less  depreciation  is  one  of  the  factors 
to  be  considered  by  the  Commission  in  determining  a  fair 
valuation. 

"While  the  cost  of  reproduction  new  is  not  likely  to 
correspond  to  the  cost  of  constructing  the  plant, ' '  says  the 
Commission  in  a  leading  decision,3  "there  are  many  reasons 
for  believing  that  the  two  figures  in  the  two  cases  are  not 
likely  to  be  very  far  apart.  "Whatever  difference  there 
may  be  in  this  respect,  is  likely  to  be  at  least  partially  due 
to  such  changes  as  have  taken  place  in  the  prices  of 
materials  and  labor  between  the  time  of  construction  and 
the  time  of  appraisal." 

But  the  original  cost  of  the  physical  property  and 
the  cost  of  reproduction  are  not  the  only  elements  to  be 
considered  in  arriving  at  a  valuation.  Allowances  for 
"going  value"  of  the  plant,  "good  will,"  and  "franchise 
value"  are  always  urged  by  the  utilities.  Upon  each  of 
these  questions  the  Commission  has  taken  a  definite  stand 
that  is  at  variance  in  some  instances  with  the  court  and 
commission  decisions  in  other  states. 

To  have  real  value  the  plant  must  be  a  "going  con- 
cern" serving  customers,  who  pay  for  the  service  rates 
high  enough  to  cover  operating  expenses,  depreciation,  and 
reasonable  returns  for  interest  and  profits  upon  the  invest- 
ment. The  building-up  of  this  business  entails  a  heavy 
expense  for  advertising,   demonstrations  and   solicitation. 

1  State  Journal  et  at.,  op.  cit.,  535-536;  City  of  Ashland  v.  Ash- 
land Water  Co.,  1909,  4  W.  E.  C.  E.,  305-306;  City  of  Appleton  v. 
Appleton  Water  Works  Co.,  1910,  5  W.  E.  C.  E.,  239,  919. 

2  Hill  et  al.,  op.  cit.,  638,  640,  1,026. 

8  In  re  application  Manitowoc  Gas  Co.,  1908,  3  W.  E.  C.  E.,  163, 
167,  1,026. 


PHYSICAL  VALUATION  33 

At  first  the  public  may  not  understand  the  advantages 
of  the  service.  It  must  be  educated.  Investors  realize 
that  these  expenses  are  necessary  to  put  a  plant  upon  a 
paying  business  basis.  Under  the  name  of  ' '  going  value ' ' 1 
the  Commission  allows  for  this  expense,  under  certain  con- 
ditions and  limitations,  in  fixing  a  valuation.  When,  how- 
ever, conditions  unusual  or  abnormal,  such  as  inefficiency 
due  to  managerial  oversights,2  arise  in  any  particular  in- 
vestigation, they  must  first  be  eliminated  before  a  reliable 
result  can  be  obtained. 

In  scores  of  cases  the  question  of  "going  value"  has 
been  passed  upon  by  the  Commission.  It  is  not  a  ' '  franchise 
value,"  nor  is  it  "good  will."  A  view  of  its  reasoning 
is  presented  in  the  following  excerpt  from  a  decision :  3 

That  the  net  costs  of  building  up  the  business  must  also  be 
taken  into  consideration  in  determining  the  value  of  the  plants 
for  rate-making  purposes  would  seem  to  apply  with  special 
force  where  by  law  the  rates  are  limited  so  as  not  to  yield  more 
than  reasonable  returns  upon  the  investment.  While  such  legis- 
lation may  not  be  a  guarantee  against  loss  of  any  kind,  it  is 
clear  that  if  the  rates  fixed  under  these  laws  should  not  include 
anything  for  the  cost  of  building  up  the  business,  there  would 
be  no  way  in  which  these  costs  could  be  made  good  to  the  inves- 
tors.    In  that  event  these  costs  would  become  a  permanent  loss 

1Hill  et  al.  v.  Antigo  Water  Co.,  1909,  3  W.  R.  C.  R.,  706-711; 
In  re  Menominee  $  Marinette  Lt.  4-  Tr.  Co.,  1909,  3  W.  R.  C.  R.,  778, 
792;  State  Journal  Printing  Co.  v.  Madison  Gas  $•  Elec.  Co.,  1910, 
4  W.  R.  C.  R.,  501,  577;  City  of  Appleton  v.  Appleton  W.  WTcs.  Co., 
1910,  5  W.  R.  C.  R.,  215,  276;  Cunningham  et  al.  v.  Chippewa  Falls 
W.  4-  Lt.  Co.,  1910,  5  W.  R.  C.  R.,  302,  315;  City  of  Milwaukee  v. 
T.  M.  E.  B.  4-  L.  Co.,  1912,  10  W.  R.  C.  R.,  122-123;  Superior  Com- 
mercial Club  et  al.  v.  Superior  W.  Lt.  <f  P.  Co.,  1912,  10  W.  R.  C.  R., 
704,  742.  Commissioner  Erickson,  Address  on  ''Going  Value,"  Terre 
Haute,  Ind.,  Sept.  23,  1914. 

2  In  re  application  Oconto  City  Water  Supply  Co.,  1911,  7  W.  R. 
C.  R.,  516-517,  877. 

3  City  of  Bacine  v.  Bacine  G.  Lt.  Co.,  1911,  6  W.  R.  C.  R.,  277-285, 
8S8. 


34       RAILROADS  AND  PUBLIC  UTILITIES 

to  them;  and  the  consumer  in  turn  would  be  relieved  from  pay- 
ing a  reasonable  return  on  a  part  of  the  investment,  or  on  the 
capital  that  is  devoted  to  furnishing  them  the  service  in  ques- 
tion.    This  is  a  situation  of  which  the  investors  are  taking  due 
notice,  and  which  is  entitled  to  due  consideration.     If  not  taken 
into  account  it  will  tend  to  keep  capital  from  entering  this  field 
as  well  as  to  prevent  exact  justice  to  capital  which  has  already 
entered  the  same.     The  former  would  result  in  hardships  or  in- 
conveniences to  the  consumers;  the  latter  would  apparently  be 
unjust  to  at  least  many  of  the  present  investors  in  public  utili- 
ties.  .    .    .   The  cost  allowed  for  the  net  cost  of  building  up  the 
business  should  not  include  items  that  have  been  incurred  under 
other  than  usual  conditions,  or  items  that  could  have  been  avoided 
by  the  exercise  of  ordinary  care  and  business  judgment.   .    .    . 
In  addition  to  those  mentioned,  there  is  also  another  element 
that  should  receive  some  consideration  in  fixing  the  cost  of  the 
business,  and  that  is  the  profits  the  plants  have  earned  since  they 
reached  a  paying  basis.     If  these  profits  are  so  large  as  to  be 
considerably  above  those  ordinarily  obtained,  it  is  as  conceivable 
that  strict  justice  between  investors  and  consumers  might  require 
that  these  excesses  should  be  treated  as  an  offset  to  early  losses 
and  that  in  this  way  all  or  a  part  of  the  earlier  losses  may  have 
been  wiped  out.   .    .    .   Just  how  much  importance  should  be  at- 
tached to  the  difference  in  the  earnings  as  between  the  earlier 
years  and  later  years,  is  not  clear.     Much  depends  on  how  the 
operating  expenses,   including  depreciation,    have   been   treated, 
and  what  sums  have  been  included  therein   or  excluded  there- 
from.  .    .    . 

Expenditures  for  the  development  of  the  business,  when  rea- 
sonable and  when  well  placed,  would,  therefore,  seem  to  be  legiti- 
mate and  to  constitute  a  charge  that,  in  some  form,  should  be 
borne  by  the  customers  or  by  those  who  avail  themselves  of 
the  services  in  question.  Whether  these  expenditures  should  be 
charged  to  construction  and  thereby  become  a  permanent  charge 
on  the  consumers,  or  be  charged  to  the  operating  expenses  and 
thereby  wiped  out  about  as  incurred,  are  questions  that  cannot 
be  settled  independently  of  the  surrounding  conditions.  When 
the  rates  and  the  earnings  of  the  utility  are  such  as  to  yield  a 


PHYSICAL  VALUATION  35 

reasonable  return  to  the  investors,  if  the  expenditures  in  question 
are  included  in  the  operating  expenses,  then  "operating-  expense" 
also  appears  to  be  the  place  to  which  they  should  be  charged. 
When,  on  the  other  hand,  the  rates  and  earnings  are  not  high 
enough  to  permit  these  expenditures  to  be  charged  to  operating 
expenses  without  resulting  in  less  than  reasonable  returns  on 
the  investment,  then  it  would  seem  that  until  the  earnings  become 
adequate,  at  least,  they  should  be  charged  to  the  cost  of  the 
plant.  These  rules  are  supported  by  reasons  that  appear  to  meet 
the  requirements  under  ordinary  conditions. 

Most  public  utilities  are  monopolies  within  their  terri- 
tory. They  operate  usually  without  competition.  In  many 
rate  cases  it  has  been  urged  by  the  utilities  that  some  valua- 
tion should  be  allowed  for  "good  will."  This  has  been 
denied  by  the  Commission  on  the  ground  that  ' '  good  will ' ' 
does  not  adhere  to  monopolies  but  is  based  on  free  com- 
petition and  voluntary  patronage.1  It  has  also  declined 
to  include  the  value  of  patent  rights.  The  Commission 
declares  that  rights  of  this  kind  are  secured  because  they 
are  profitable,  or  because,  in  one  way  or  another,  they  tend 
to  increase  the  net  earnings.  It  holds  that  the  prices  paid 
for  rights  of  this  kind  would  seem  to  be  operating  ex- 
penses, rather  than  capital  charges,2  and  "if  regarded  as 
capital  charges  at  all,  they  ought  to  be  written  off  during 
the  life  of  these  rights  from  the  profits  for  which  they  are 
responsible. ' ' 

Neither  should  there  be  any  allowance  for  the  valua- 
tion of  a  franchise  above  its  actual  cost  to  the  company 
in  obtaining  it.  It  has  a  value  for  taxation  purposes  in 
that  it  furnishes  the  holders  with  the  right  to  carry  on 
their  business  with  profit.     At  all  of  the  early  valuation 

1  In  re  Cashton  Lt.  <f  P.  Co.,  1908,  3  W.  R.  C.  R.,  84-85 ;  Hill  et  al., 
op.  cit.  720;  Payne  et  al.  v.  Wis.  Tel.  Co.,  1909,  4  W.  R.  C.  R.,  60. 

2  City  of  Milwaukee  v.  T.  M.  E.  B.  #  L.  Co.,  1912,  10  W.  R.  C.  R., 
92,  873. 


36       RAILROADS  AND  PUBLIC  UTILITIES 

hearings  before  the  Commission,  utility  owners  urged  that 
a  value  should  be  given  to  the  franchise,  and  an  amount 
included  in  the  valuation  to  be  fixed  for  rate-making  pur- 
poses. The  only  measure  of  franchise  value  recognized 
by  the  courts  is  the  earning  capacity  of  the  property. 
Earnings  depend  upon  rates.  The  futility  of  the  task  of 
determining  the  reasonableness  of  rates  by  any  standard 
dependent  upon  the  value  of  a  franchise  must  be  apparent.1 
In  denying  the  request  to  include  a  franchise  value  in 
the  Antigo  Water  Works  case,  one  of  the  early  important 
utility  valuations,  the  Commission  pronounced  the  follow- 
ing doctrine  to  which  it  has  adhered : 2 

It  is  difficult,  if  not  impossible,  to  discover  any  justice  in  the 
practice  of  including  in  the  valuation  of  a  plant,  for  rate-making 
purposes,  such  values  of  its  franchise  as  are  based  on  surplus 
earnings  only,  or  which  have  not  cost  the  plant  anything.  For 
a  city  or  town  to  grant  franchise  privileges  free  of  cost,  to  per- 
mit so  high  rates  for  the  services  rendered  under  it  that  the 
franchise  acquired  considerable  value,  and  then  to  permit  this 
value  to  be  included  in  the  capital  account  of  the  plant  and 
thereby  become  a  permanent  charge  on  the  consumers,  would 
hardly  seem  fair  from  any  point  of  view.  Under  such  practices 
utilities  are  not  only  given  the  opportunity  of  making  safe  in- 
vestments, which  would  yield  reasonable  returns,  but  they  are, 
in  addition  to  this,  granted  valuable  privileges  which  enable  them 
to  exploit  their  business.  To  include  anything  in  the  value  upon 
which  rates  are  based  for  which  no  equivalent  has  been  rendered, 
would  apparently  disturb  the  equitable  relation  that  should  be 
maintained  between  utilities  and  their  customers. 

The  conclusion  that  it  does  not  appear  to  be  equitable  as 
between  the  investors  and  the  customers  of  public  utilities  to 
include  any  other  franchise  value  in  the  valuation  of  such  utili- 
ties for  rate-making  purposes  than  such  values  which  are  rep- 

1City  of  Appleton  v.  Appleton  Water  Works,  1910,  5  W.  R.  C.  R., 
215,  281,  282. 

2  Hill  et  al.,  op.  cit.,  729,  1019. 


PHYSICAL  VALUATION  37 

resented  by  the  cost  of  franchises  to  these  utilities,  may  be  at 
some  variance  "with  the  practices  of  many  appraisers  in  valuing 
such  plants.  It  may  also  be  somewhat  out  of  line  with  the  opin- 
ions of  at  least  some  of  the  courts  upon  this  question.  The  con- 
clusion, however,  would  seem  to  be  almost  unavoidable,  when  the 
various  factors  involved  are  analyzed  in  the  light  of  economic 
principles. 

As  stated  in  a  previous  chapter  the  "Wisconsin  legisla- 
ture in  1911  repealed  all  franchises  in  the  state  and  granted 
in  lieu  thereof  indeterminate  permits.  It  has  likewise  been 
held  by  the  Commission  that  these  cannot  operate  to 
enhance  the  value  of  the  property  upon  which  returns 
must  be  computed.1 

In  fixing  a  fair  value  of  the  utility  property  the  Com- 
mission considers  as  more  or  less  controlling  the  original 
cost  of  construction,  the  amount  expended  in  permanent 
improvements  and  extensions,  the  reproduction  cost  new, 
the  reproduction  cost  new  less  depreciation,  and  going 
value.  To  eliminate  fluctuations  in  market  prices  due  to 
temporary  causes  the  reproduction  cost  is  based  on  material 
and  labor  prices  for  five  years  prior  to  the  appraisement.2 
Bond  issues  are  investigated.  An  allowance  is  made  for 
"working  capital."3  After  all  of  these  facts  have  been 
ascertained,  the  Commission  fixes  a  tentative  valuation. 
Following  a  hearing  on  the  valuation,  at  which  the  utility 
and  the  public  are  permitted  to  present  additional  evidence, 
the  necessary  adjustments  are  made  by  the  Commission 
and  the  final  valuation  is  announced.     The  Commission 

1  City  of  Appleton  et  al.,  op.  cit.,  284-2S5 ;  In  re  Cashton  Lt.  4'  P> 
Co.,  op.  cit.,  84. 

2  City  of  Whitewater  v.  Whitewater  El.  Lt.  Co.,  1910,  6  W.  E.  C. 
E.,  132,  139;  Eacine  v.  Racine  Gas  Lt.  Co.,  1911,  6  W.  E.  C.  E.,  238; 
City  of  Appleton  et  al.,  op.  cit.,  228-235;  In  re  Manitowoc  Water 
Works,  1911,  7  W.  E.  C.  E.,  71,  85. 

3  City  of  Beloit  v.  Beloit  W.  G.  ^  El.  Co.,  1911,  7  W.  E.  C.  E., 
1S7,  242,  881. 


38       RAILROADS  AND  PUBLIC  UTILITIES 

has  no  specific  rule  in  determining  this  valuation  except 
its  prudence  and  judgment  as  applied  to  the  facts.  Upon 
this  valuation  a  fair  return  is  permitted  and  the  amounts 
for  interest  and  depreciation  are  computed  preparatory  to 
prescribing  rates. 

This,  in  brief  outline,  is  the  method  of  determining 
' '  fair  value ' '  for  rate-making  and  municipal  purchase  pur- 
poses. The  limits  of  a  single  chapter  preclude  an  ex- 
haustive discussion  of  the  principles  of  valuation  as  inter- 
preted by  the  Wisconsin  Railroad  Commission.  For  a 
detailed  discussion  of  special  features  of  the  method  em- 
ployed, the  reader  should  consult  the  Commission's  pub- 
lished reports  of  cases,  and  the  papers  and  discussions 
printed  from  time  to  time  by  its  members. 

That  valuations  fixed  by  this  method  1  are  usually  lower 


Case 

Present 
value 

Total 
award 

Total  award 

per  cent  in 

excess  of 

present  value 

In  re  Village  of  Cashton  (3  W.R.C.R.,  67) .  .  . 

In  re  Fond  du  Lac  (5  W.R.C.R.,  482) 

In  re  Appleton  (6  W.R.C.R.,  97) 

$2,68S 
281,922 
242,127 
231,047 

44,992 
510,953 
119,229 
126,651 

$3,100* 
320,000 
255,000 
247,500 

50,000 
525,000 
128,800 
133,000 

15 

13 

5 

In  re  Manitowoc  (7  W.R.C.R.,  71) 

In  re  Kaukauna  (8  W.R.C.R.,  409) 

In  re  Oshkosh  (12  W.R.C.R.,  602) 

6 

11 

3 

In  re  Antigo  (13  W.R.C.R.,  156) 

7 

In  re  Beaver  Dam  (13  W.R.C.R.,  169) 

5 

*  Including  damage  to  property  not  taken. 

than  those  fixed  by  the  courts  in  condemnation  proceedings 
will  appear  quite  clearly.  The  principal  reason  may  be 
found  in  the  fact  that  courts  and  condemnation  juries 
usually  place  a  value  upon  the  unexpired  franchise.     In  a 

1  The  following  table  of  Wisconsin  Commission  eases,  where  prop- 
erty was  valued  for  municipal  purchase,  shows  the  amount  allowed 
for  ' '  intangibles ' ' : 

Comparisons  with  court  cases  may  be  found  in  brief  filed  by  Olin, 
Butler  and  Curkeet  in  HcGregor-Noe  Hardware  Co.  et  al.  v.  Spring- 
field Gas  4"  Electric  Co.  and  Springfield  Traction  Co.,  before  Mis- 
souri Public  Service  Commission. 


PHYSICAL  VALUATION  39 

long  line  of  cases  the  courts  have  held  that  a  franchise 
is  property  which  must  be  paid  for  when  it  is  taken  in 
condemnation  proceedings.  In  Wisconsin,  under  the  Pub- 
lic Utility  Law,  where  the  indeterminate  permit  has  super- 
seded the  ordinary  franchise,  the  Commission  has  decided 
that  an  indeterminate  permit  has  no  value.  Beginning  with 
the  case  of  the  Cashton  Light  and  Power  Company,  it  has 
consistently  held  that  no  value  attaches  to  a  permit  to  do 
business,  when  the  municipality  determines  to  acquire  the 
property.  This  doctrine  was  challenged  in  the  case  of  the 
City  of  Appleton  v.  Appleton  Water  Works.1  Upon  appeal 
to  the  circuit  court  the  court  held  that  the  indeterminate 
permit  had  at  least  a  nominal  value.  The  case  was  carried 
to  the  Supreme  Court  of  Wisconsin.  Justice  Winslow  gave 
the  opinion  of  the  court.  He  held  in  substance  that  an 
indeterminate  permit  was  much  like  a  franchise  for  a  term 
of  years,  after  the  term  of  years  has  expired.  Further- 
more, the  court  pointed  to  the  fact  that  the  legislature  had 
in  mind  ultimate  public  ownership  and  also  the  advan- 
tages resulting  from  an  option  to  purchase  at  any  time. 
"One  of  these  advantages,"  the  court  said,  "plainly  is  that 
there  can  be  no  unexpired  franchise  to  be  considered  or 
allowed  for  in  case  of  purchase. ' ' 2 

In  the  case  of  the  Manitowoc  Water  Works  Company, 
which  was  an  application  for  determining  just  compensa- 
tion to  be  paid  to  the  company  by  the  city  of  Manitowoc 
for  its  property,  the  tentative  valuation  of  the  physical 
property  as  of  January  1,  1911,  showed  a  present  value 
of  $23 1,647.  A  similar  valuation  as  of  December  1,  1907, 
showed  a  present  value  of  $209,437.  A  board  of  appraisers 
composed  of  disinterested  persons  had  valued  the  property 
as  of  December  26,  1906,  fixing  the  same  at  $235,321. 
Approximately  five  years  later,  the  "fair  value"  of  these 

1  City  of  Appleton  v.  Appleton  Water  Works,  5  W.  E.  C.  R.,  228. 
2 154  Wisconsin  Reports,  121. 


40       RAILROADS  AND  PUBLIC  UTILITIES 

properties,  applying  the  Commission's  general  method 
varied  hy  such  facts  as  local  conditions  suggested,  was 
fixed  at  $236,000. 

It  is  interesting  to  compare  this  case  with  that  of  the 
Long  Island  Water  Supply  Company  v.  Brooklyn.1  The 
city  of  Brooklyn  had  purchased  the  property  and  fran- 
chises of  the  Long  Island  Water  Supply  Company  under 
a  special  act  of  the  legislature.  The  franchise  had  about 
thirty-eight  years  to  run.  The  franchise  was  determined 
not  to  have  been  exclusive.  The  total  award  granted  the 
owners  of  the  property  was  fixed  at  $570,000,  divided  as 
follows :  for  the  land,  $77,500 ;  for  the  pumping  plant, 
reservoir,  distribution  system  and  all  other  appurtenances, 
$292,500,  and  for  the  franchise,  $200,000.2 

It  should  not  be  inferred  that  the  "Wisconsin  method  of 
valuing  public  service  property  is  preferable  because  it  has 
occasionally  resulted  in  lower  valuations  than  those  which 
would  have  been  fixed  by  other  methods.  No  method  unless 
it  is  based  upon  considerations  of  equity  to  all  concerned 
can  be  made  to  deal  justly  with  the  conflicting  interests 
involved,  and  will  establish  that  degree  of  stability  and 
definiteness  in  the  relations  between  owners  and  users 
which  a  continuous  rendering  of  adequate  service  requires. 

One  further  well-known  fact  should  not  be  overlooked. 
A  commission  employing  regularly  a  corps  of  experts  who 
have  acquired  intimate  knowledge  of  the  peculiar  condi- 
tions surrounding  each  plant  is  more  likely  to  arrive  at 
reasonably  close  and  fair  valuations  than  a  body  organized 
temporarily  without  such  intimate  knowledge. 

*166  U.  S.,  685. 

2  Other  cases  involving  the  valuation  of  properties  in  condemna- 
tion proceedings,  where  franchises  were  specifically  held  to  be  sub- 
ject to  compensation,  are  the  following:  Montgomery  County  v. 
Schuylkill  Bridge  Co.,  110  Pa.  State,  54;  Monongahela  Navigation 
Co.  v.  United  States,  148  U.  S.  312;  Toivn  of  Bristol  v.  Bristol  and 
Warren  Water  Works,  23  Khode  Island,  274. 


PHYSICAL  VALUATION  41 

In  its  chief  aspects  the  Wisconsin  Railroad  Commis- 
sion's method  of  determining  "fair  value"  has  been  con- 
firmed by  the  Wisconsin  Supreme  Court.  Certain  features 
have  also  been  sustained  by  courts  and  regulating  bodies 
in  other  states.  Fair  value  as  based  upon  the  cost  of 
reproduction  new  was  approved  by  the  Massachusetts  Joint 
Board  which  made  an  appraisal  of  the  property  of  the 
New  York,  New  Haven  and  Hartford  Railroad.  It  was 
approved  also  in  the  appraisal  for  rate  purposes,  of  the 
People's  Gas  Light  &  Coke  Company  of  Chicago.  In  the 
case  of  the  Columbus  Railway  and  Light  Company  against 
the  city  of  Columbus,  Ohio,  the  fair  value  of  the  property 
was  taken  as  its  cost  of  reproduction  new.  When  deprecia- 
tion is  computed  on  the  sinking  fund  plan,  cost  of  repro- 
duction new  as  the  standard  of  value  has  been  upheld  by 
the  New  Jersey  Public  Utilities  Commission. 

It  is  not  correct  to  speak  of  a  standard  method  of 
valuation.  Thus  in  a  discussion  of  general  principles  in 
Hill  v.  Antigo  Water  Company  the  Commission  says : x 

While  the  cost  of  reproduction  new  is  thus  ordinarily  one  of 
the  important,  if  not  the  most  important,  elements  that  enter  into 
that  valuation  upon  which  the  earnings  should  be  based,  there  may 
also  be  instances  when  the  cost  of  reproduction  new  less  depre- 
ciation, which,  as  stated,  represents  the  present  value  of  public 
utilities,  may  bear  a  close  relation  to  the  valuation  in  question. 
This  may  apply  with  special  force  to  plants,  the  rates  of  which 
have,  on  the  whole,  been  ample  to  cover  operating1  expenses  in- 
cluding depreciation,  and  a  fair  amount  for  interest  and  profits, 
but  in  which  cases  the  amount  collected  for  the  depreciation  has 
not  been  set  aside  or  used  for  the  purposes  for  which  it  was  col- 
lected, but  on  the  contrary,  has,  in  one  form  or  another,  been 
distributed  among  its  stockholders.  ...  If  the  stockholders,  in- 
stead of  keeping  up  the  plant,  have  appropriated  for  their  own 
use  the  money  contributed  by  the  customers  for  this  purpose, 

1  Hill  et  al.,  op.  tit.,  623. 


42       RAILROADS  AND  PUBLIC  UTILITIES 

the  amount  so  appropriated  should  either  be  returned  to  the  de- 
preciation fund  or  deducted  from  the  valuation  upon  which  the 
rates  are  based. 

Thus  there  are  conditions  when  fair  value  for  rate- 
making  purposes  should  take  into  consideration  the  amount 
of  accrued  depreciation.  This  view  is  in  line  with  the  rule 
laid  down  by  the  United  States  Supreme  Court  in  Knox- 
ville  v.  Water  Company.1 

The  making  of  these  valuations  constitutes  a  consider- 
able part  of  the  expense  incurred  by  the  Commission.  The 
following  table  shows  the  number  of  utility  valuations  that 
have  been  made : 

Number  op  Physical  Valuations,  Exclusive  of  Steam  Railroads 


Utilities 

Street  and 
interurban 

Water 

powers 

Total 
origi- 
nal 

Calendar 
years 

Orig- 
inal 

Tenta- 
tive, 

approx- 
imate 
or 

revised 

Orig- 
inal 

Tenta- 
tive, 
approx- 
imate 

or 
revised 

Orig- 
inal 

Tenta- 
tive, 

approx- 
imate 
or 

revised 

Grand 
total 

1907 

1908 

1909 

1910 

1911 

1912 

1913 

19 
31 

30 
21 
31 

09 

45 

2 
24 
24 
22 
32 
54 
68 

21 
4 
2 
1 

10 
2 
0 

0 
21 

25 
27 
18 

28 
28 

0 
0 
0 
0 
1 
0 
1 

0 
0 
0 
0 
0 
6 
9 

40 
35 
32 
22 
42 
71 
46 

42 
80 
81 
71 
92 
159 
151 

Total.  . 

246 

226 

40 

147 

2 

15 

228 

676 

The  valuation  of  the  steam  railroads  of  the  state  has 
been  annually  revised  since  the  first  valuation  in  1903  . 

1 212  U.  S.,  1. 


CHAPTER  IV 

BATE  OF  RETURN 

Principles  promulgated  by  the  Railroad  Commission  of 
Wisconsin  for  the  valuation  of  properties,  for  the  estab- 
lishment of  service,  and  the  introduction  of  advanced  ac- 
counting, have  now  been  quite  generally  accepted  by  the 
people  and  the  utilities.  Aside  from  the  ascertainment  of 
the  exact  facts  in  each  case,  there  is  little  contention  over 
the  applications  of  the  rules  to  be  followed.  With  the  rate 
of  return  to  be  allowed  a  railroad  or  utility  upon  its  invest- 
ment the  question  is  different.  This  is  to-day  the  most 
mooted  problem  in  the  field  of  regulation.  It  is  a  source  of 
dispute  and  argument  before  every  state  commission  in 
every  case  affecting  plant  earnings.  In  the  establishment  of 
rates  for  service  this  factor  is  exceedingly  important. 

Many  of  the  other  state  commissions  have  cautiously 
dodged  this  subject.  The  problem  has  been  considered  of 
such  importance  that  the  Wisconsin  Commission  has  made 
it  the  theme  of  extended  investigations.  In  three  leading 
cases,1  and  many  minor  ones,  it  has  been  the  subject  for 
lengthy  discussions  and  the  fundamental  principles  that 
shall  govern  are  announced.  Because  of  the  well-reasoned 
position  taken  by  the  Commission  these  decisions  are  of 
importance. 

By  rate  of  return  is  meant  the  amount  of  interest  and 

1  Hill  et  al.  v.  Antigo  Water  Co.,  1909,  3  W.  R.  C.  R.,  623 ;  State 
Journal  Printing  Co.  v.  Madison  Gas  Sr  Electric  Co.,  1910,  4  W.  R. 
C.  R.,  501;  Payne  et  al.  v.  Wisconsin  Telephone  Co.,  1909,  4  W.  R. 
C.  R.,  1. 

43 


44       RAILROADS  AND  PUBLIC  UTILITIES 

profit  allowed  upon  the  actual  investment  of  a  public 
utility.  Older  economists  have  generally  classed  interest 
with  profits;  but  the  Commission  has  followed  the  later 
economic  writers  who  differentiate  the  two  factors  on  the 
theory  that  "interest  arises  from  the  use  of1  capital,  and 
profits  have  their  source  in  the  business  ability,  skill  and 
foresight  of  the  management,  as  well  as  the  risks  assumed 
by  it  or  by  the  entrepreneur."  This  distinction,  while 
unimportant  under  the  economic  conditions  of  a  quarter  of 
a  century  ago,  is  vital  to-day  under  modern  business 
methods.  Discussed  in  many  cases,2  it  is  perhaps  stated 
the  most  succinctly  by  Commissioner  Erickson  in  a  recent 
address  when  he  said: 

"Before  the  advent  of  the  modern  methods  of  doing  business 
and  the  present  facilities  of  credit,  the  capitalist  and  the  em- 
ployer were  one  and  the  same  person.  Under  these  conditions 
there  was  no  very  good  reason  for  separating  the  compensation 
of  these  two  factors.  Since  the  advent  of  the  corporations,  sys- 
tems of  credit  and  other  modern  conditions,  all  this  has  changed. 
To-day  a  condition  has  developed  under  which  business  is  largely 
earned  on  with  borrowed  capital.  Those  who  furnish  the  capital 
receive  interest  thereon.  Those  who  borrow  it  and  use  it  in 
their  business  pay  the  interest,  and,  as  compensation  for  their 
sendees  of  management  and  the  risks  they  assume,  receive  prof- 
its or  the  surplus  above  the  expenses.  This  condition  has  led  to 
the  separation  of  the  functions  of  the  capitalist  and  the  employer 
and  to  a  more  complete  analysis  of  the  compensation  which  each 
of  these  two  factors  receive.  The  economic  reasons  why  interest 
is  paid  for  the  use  of  capital  might  be  summed  up  in  the  axiom 
that  capital  is  the  means  of  production." 

To  be  specific  the  Commission  has  held  that  interest 
proper  should  include  only  the  amount  that  is  paid  for 

1  Hill  et  al.,  op.  cit.,  751-752. 

2  For  a  more  detailed  discussion  see  State  Journal  Printing  Co., 
op.  cit.,  635-637. 


RATE  OF  RETURN  45 

the  use  of  the  capital  employed,  while  profits  consist  of  the 
wages  of  management,  broadly  interpreted,  of  compensa- 
tion for  the  risks  and  responsibilities  that  must  be  borne  by 
the  employers,  "and  of  such  other  compensation,  if  any,  as 
may  be  demanded  by  the  conditions. ' '  * 

Under  the  terms  of  the  Wisconsin  Public  Utility  Law, 
which  make  a  fair  valuation  of  the  physical  property  the 
basis  of  rates  and  returns,  excessive  capitalization  cannot 
justify  higher  than  reasonable  returns.  It  has  been  repeat- 
edly held  by  the  Commission  that  the  fact  that  excessive 
amounts  of  securities  may  have  been  issued  and  that  rates, 
before  the  period  of  state  regulation,  may  have  been  high 
enough  to  justify  the  same,  would  not  justify  it  in  ap- 
proving them,  if  they  had  been  found  unreasonable  in 
other  respects.2 

Kate  of  return  is  not  a  constant,  definite  factor.  The 
law  says  it  must  under  normal  conditions  be  reasonable.3 
The  rate  itself  is  left  to  the  judgment  of  the  Commission 
to  determine.  Opinions  as  to  the  judgment  of  a  return 
which  is  "reasonable"  represent  two  extremes.  By  some 
it  is  argued  that  the  rate  of  interest  and  profit  allowed 
on  an  investment  should  not  exceed  that  at  which  the 
government  could  obtain  the  money,  if  it  owned  and 
operated  the  facilities.  Others  contend  that  no  restric- 
tions should  be  placed  upon  the  returns  that  can  be  earned 
by  rates  for  service  based  on  all  that  the  traffic  will  bear. 
Judged  by  the  opinions  of  the  Commission  neither  con- 
tention is  just.  It  finds  the  rate  of  return  located  some- 
where between  these  two  limits,  depending  upon  the  char- 
acter of  the  utility,  the  stability  of  its  business,  local  condi- 
tions under  which  it  is  operated,  the  hazards  of  the  enter- 

1  Kill  et  al.,  op.  tit.,  764,  998 ;  City  of  Milwaukee  v.  T.  M.  E.  B. 
4-  L.  Co.,  1912,  10  W.  R.  G.  E.,  240,  859. 

2  Hill  et  al.  726-727,  997. 

3  Single  et  al.  v.  C.  M.  $■  St.  P.  B.  Co.  et  al,  1911,  7  W.  R.  C.  R., 
180,  860. 


46       RAILROADS  AND  PUBLIC  UTILITIES 

prise  and  the  limitations  fixed  by  the  terms  and  spirit  of 
the  Public  Utility  Law.1  Profits  as  a  factor  in  the  amount 
of  return  depend  on  these  and  other  elements  to  be  dis- 
cussed  later. 

The  rate  of  interest  allowed  on  the  investment  depends 
first  upon  the  character  of  the  utility.  As  a  general  rule 
the  Commission  has  found  that  investments  in  water  plants 
are  the  safest,  followed  by  gas  and  electric  concerns.2 
Telephone  investments  are  the  least  secure.  Inventions  in 
water- works  plants  are  few ;  in  the  telephone  field  improve- 
ments are  constantly  being  made.  "As  water  works,  gen- 
erally speaking,  are  among  the  safest  of  undertakings, 
when  once  they  have  reached  a  paying  basis,  safer  in  fact 
than  most  other  local  utilities,  the  speculative  gains  therein 
should  be  comparatively  low, ' ' 3  says  the  Commission  in 
one  case.  Again  in  discussing  the  telephone  situation  in 
another  decision  it  said  :  "Even  though  the  patronage  and 
revenues  of  a  telephone  company  remain  stable  and  business 
increases  in  times  of  depression,  the  telephone  business,  in 
the  present  state  of  the  art,  nevertheless  remains  a  business 
subject  to  great  risks  and  uncertainties.  It  may  be  only  a 
few  years  more  before  large  parts  of  the  existing  plants  will 
be  discarded  because  of  better  service  which  new  inventions 
can  afford.  There  are  those  who  believe  that  the  manual 
central  energy  system  will  give  way  to  the  automatic, 
just  as  the  magneto  board  was  displaced  by  the  common 
battery  board."  4 

A  second  factor  considered  by  the  Commission  is  the 
stability  of  the  business.  It  finds  that  the  rate  of  interest 
charged  during  the  period  of  construction,  or  on  a  new 
plant  that  is  just  developing,  is  greater  than  for  an  older 

1  Howard  T.  Lewis,  ' '  Interest  and  Profits  in  Kate  Regulation, ' ' 
Political  Science  Quarterly,  XXVII,  244. 

2  State  Journal  et  al.,  op.  cit.,  632-647. 

3  Hill  et  al,  op.  cit.,  761. 
*  Payne  et  al.,  op.  cit.,  67, 


RATE  OF  RETURN  47 

plant  already  established  as  a  paying  proposition.  Its 
views  are  well  expressed  in  the  following  extract  from  a 
decision : 

To  permit  relatively  high  rates  during  the  experimental x 
period  of  public  utilities  is  often  both  necessary  and  in  line  with 
good  policy  in  other  respects.  Without  it  the  necessary  capital 
may  not  be  forthcoming  at  all.  .  .  .  Older  and  better  estab- 
lished utilities  can  secure  money  for  extensions  at  lower  rates 
than  new  utilities.  This  applies  also  in  renewing  their  bond  is- 
sues and  other  loans.  In  many  cases  they  are  even  able  to  refund 
outstanding  bond  issues  at  much  more  favorable  rates  of  interest 
than  the  rates  paid  in  the  past.  In  view  of  this  it  is  clear  that 
there  should  be  a  gradual  decline  in  the  rates  of  interest  of  such 
plants.  This  is  also  an  important  fact,  for  it  is  undoubtedly  the 
case  that  the  rate  of  interest  actually  paid  is  one  of  the  elements 
that  should  be  taken  into  account  in  considering  all  interest  al- 
lowances on  the  investment. 

Local  conditions  under  which  a  plant  is  operated  are 
another  element  that  cannot  be  disregarded.  If  the  utility 
is  owned  by  the  municipality  it  can  obtain  capital  at 
lower  terms  than  a  private  plant,  or  perhaps,  if  privately 
owned,  its  management  and  the  community  may  be 
estranged  and  harsh  ordinances  may  burden  it.  Again 
the  local  management  may  be  efficient,  but  the  plant  may 
have  been  built  in  advance  of  the  needs  of  the  community. 
Full  cognizance  of  all  of  these  local  conditions  is  taken 
by  the  Commission  as  illustrated  from  the  views  expressed 
in  four  different  decisions: 

As  to  the  rate  of  interest  to  be  allowed,  there  is  reason  l  for 
making  a  distinction  between  privately  and  publicly  owned  utili- 

1  Hill  et  al.,  op.  cit.,  726,  762,  997;  Also  see  City  of  Milwaukee  v. 
T.  H.  E.  B.  $  L.  Co.,  1912,  10  W.  E.  C.  R.,  241;  In  re  Fond  du  Lac 
Water  Co.  1910,  5  W.  R.  C.  R.,  482,  506;  State  Journal  et  al,  o%>.  cit., 
501,  629. 

2  Dick  et  al.  v.  Madison  Water  Commission,  1910,  5  W.  R.  C.  R, 
745,  897. 


48       RAILROADS  AND  PUBLIC  UTILITIES 

ties.  If  the  same  rate  of  return  were  to  be  allowed,  other  things 
being  equal,  the  consumer  would  hardly  have  any  advantage  in 
taking  service  from  a  municipal  plant.  But  a  difference  in  the 
rate  of  interest  will  give  him  all  advantage  in  taking  service 
from  a  municipal  plant.  In  the  present  case  the  city  pays 
3^  to  4  per  cent  interest  on  the  bonds  issued  to  cover  the 
water  plant.  A  private  plant  would  demand  at  least  6  per 
cent  or  more.  If  the  city  is  permitted  a  return  of  4  per  cent 
on  the  investment,  the  saving  in  interest  over  a  privately 
owned  plant  on  a  6  per  cent  basis  amounts  to  a  considerable 
sum. 

Bonds  ought  to  sell  at  par.  This  is  certainly  the  case  :  when 
the  bonds  amount  to  less  than  the  cost  value  of  the  plant,  or  for 
public  utilities  which  have  passed  the  development  period  and 
the  earnings  of  which  are  ample  to  cover  all  legitimate  demands 
that  are  made  upon  them.  But  such  securities  do  not  often  sell 
at  such  prices.  For  this  local  conditions  are  often  responsible. 
For  instance,  the  relation  between  the  plant  and  the  community 
may  be  strained  or  irritating.  This  relation  may  be  as  embar- 
rassing and  harmful  when  caused  by  political  agitation  and 
strife  as  when  due  to  lack  of  tact  or  to  arbitrary  methods  on  the 
part  of  the  management  of  the  plant. 

It  would  seem  that  when  a  utility  undertakes  to  build  2  con- 
siderably in  advance  of  the  needs  of  the  community,  the  utility 
can  hardly  expect  a  large  return  upon  this  investment  immedi- 
ately. 

The  rate  of  profits  depends  upon  the  supply  of  business  3  ca- 
pacity and  initiative,  the  risks  involved,  the  nature  of  the  under- 
takings, and  many  other  conditions.  These  rates,  therefore,  vary 
as  between  the  different  industries  and  the  different  classes  of 
service.  They  even  vary  as  between  the  various  public  utilities 
in  the  same  place,  as  well  as  often  also  between  like  utilities  in 
different  localities. 

1  Hill  et  al.  v.  Antigo  Water  Co.,  op.  cit.,  754. 

2  City  of  Beloit  v.  Bcloit  TV.  G.  #  El.  Co.,  1911,  7  W.  E.  C.  E., 
347,  861. 

3  Superior  Commercial  Club  et  al.  v.  Superior  W.  L.  $  P.  Co., 
1912,  10  W.  E.  C.  E.,  758,  861. 


RATE  OF  RETURN  49 

The  influence  of  risk,  or  the  hazard  of  the  business, 
on  an  interest  rate  seems  so  self-evident  in  all  lines  of 
industry  as  to  need  little  comment.  The  less  the  risk  the 
lower  the  rate,  and  vice  versa.  Postal  savings  deposits, 
for  example,  because  of  the  lack  of  risk,  draw  a  low  rate 
of  interest.  This  risk  is  lessened  where  competition  does 
not  exist  as  in  the  case  of  most  utility  plants.  In  every 
decision  affecting  a  rate  of  return  the  risk  is  pointed  out 
as  an  element  that  affects  the  rate  for  both  interest  and 
profits.    Thus  the  Commission  says : 

As  the  rate  of  interest  or  profits  is  largely  x  dependent  upon 
the  risks  it  would  seem  to  follow  that  the  rate  of  interest  should 
be  lower  in  monopolistic  than  in  competitive  enterprises.  This 
position  is  also  strengthened  when,  as  for  public  utilities,  reason- 
able returns  are  recognized  by  law. 

The  concluding  factor  bearing  on  the  rate  of  interest 
is  the  effect  the  provisions  of  the  Public  Utility  Law  have 
on  the  enterprise  regulated.  Competition  is  largely  elimin- 
ated through  the  indeterminate  permit  statute — a  fact 
that  gives  greater  security  to  the  bonds  of  a  company. 
The  Commission  pointed  out  in  an  early  case  2  that  the 
effect  of  the  law  would  be  to  lower  the  rate  of  interest. 
According  to  some  utility  managers  this  has  already  been 
accomplished.  Under  the  indeterminate  permit  law,  ap- 
plicable to  all  utilities,  no  new  competition  is  allowed 
unless  public  convenience  and  necessity  demand  it.  How 
these  provisions  of  the  Public  Utility  Law  influence  the 
interest  rate  is  suggested  in  the  following  statement  from 
the  Commission's  decision: 

1In  re  Menominee  $  Marinette  Lt.  #•  Tr.  Co.,  1909,  3  W.  E.  C.  E., 
819,  998. 

2  Payne  ct  al.  v.  Wis.  Tel.  Co.,  1909,  4  W.  E.  C.  E.,  63-64. 


50       RAILROADS  AND  PUBLIC  UTILITIES 

Under  the  laws  of  Wisconsin,  public  utilities,  under  ordinary  1 
conditions,  are  entitled  to  earnings  for  their  service  that  will 
yield  enough  to  cover  operating  expenses,  including  depreciation 
and  a  reasonable  return  on  the  property  actually  used  and  useful 
for  the  convenience  of  the  public. 

These  are  the  five  specific  factors  taken  into  account  in 
determining-  the  rate  of  interest.  There  are  other  general 
conditions  that  must  be  satisfied.  Thus  the  Commission 
says: 

The  reasonable  rate  of  interest  is  the  rate  that  under  2  the 
conditions  is  fair  to  both  investors  and  consumers.  The  minimum 
rate,  in  such  cases,  should  be  limited  to  the  rate  at  which  capital 
could  be  had,  but  this  rule  is  perhaps  more  applicable  to  new 
investments  than  to  investments  already  made,  although  it  is  not 
without  influence  in  the  latter  case.  The  reasonable  rate  of  in- 
terest and  profit  can,  perhaps,  be  said  to  be  a  rate  that  closely 
approximates  the  returns  that  are  received  on  capital  investment 
in  other  undertakings  where  the  risks  involved  and  other  condi- 
tions are  similar.  Measured  by  this  standard,  these  rates  would 
be  higher  where  the  plants  are  new,  or  where  the  risks  are 
greater,  than  later  on  when  the  business  has  become  more  firmly 
established.  It  would  also  be  greater  than  the  rates  obtained  on 
money  invested  in  mortgages  or  in  other  places  where  the  risks 
are  comparatively  low. 

As  indicated  by  the  above  statement  the  Commission 
finds  in  determining  upon  the  rate  of  return  that  it  is 
necessary  to  "closely  approximate  the  returns  that  are 
received  from  capital  invested  in  other  undertakings." 
This  entails  an  investigation  of  the  investment  and  in- 
dustrial situation  generally.  All  of  the  elements  that  may 
affect  business  conditions  must  be  considered.  It  is  axio- 
matic to  say  that  no  state  can  set  up  a  standard  of  its 

1  State  Journal,  etc-,  op.  cit.,  623,  897. 

2  In  re  Menominee  #  Marinette  Lt.  #  Tr.  Co.,  1909,  3  W.  E.  C.  E., 
793,  794,  998. 


RATE  OF  RETURN 


51 


own.1  Interest  rates  are  determined  by  the  general  finan- 
cial market.  Capital,  being  largely  mobile,  is  controlled  by 
general  laws. 

Such  investigations  conducted  by  the  Commission  into 
general  and  financial  conditions  show  that  from  1873  to 
1896  there  was  a  gradual  decline  in  prices  2  and  that  since 
the  latter  date  prices  have  gradually  risen  and  the  dollar 
has  depreciated  in  value  until  now  it  is  worth  about  60 
per  cent  of  what  it  was  worth  in  1900.  Few  people 
realize  how  rapid  this  decline  has  been. 

If  the  price  level  of  1900  in  the  North  Central  States 
is  represented  by  100,  investigations  of  the  United  States 


Relative  Food  Prices,  Cost  of  a  Year's  Supply  of  Food,  and 

Relative  Purchasing  Power  of  Money,  1900-1913.* 

(North  Central  States) 


Relative 

prices  of 

food 

Cost  of  a  year's  supply 

of  food  for  average 

workingman's  family 

Relative  pur- 
chasing power 
of  money 

1900 

100.0 
107.0 
112.6 
112.6 
113.3 
113.6 
117.6 
122.9 
128.2 
135.9 
143.5 
140.8 
153.8 
166.5 

$301 
322 
339 
339 
341 
342 
354 
370 
386 
409 
432 
426 
463 
501 

100.0 

1901 

93.5 

1902 

88.8 

1903 

88.8 

1904 

88.3 

1905 

88.0 

1906 

85.0 

1907 

81.2 

1908 

78.0 

1909 

73.6 

1910 

69.7 

1911 

71.0 

1912 

65.0 

1913f 

60.0 

*  Table  taken  from  article  by  Prof.  T.  S.  Adams  on  ' '  Investing 
in  Service,"  La  Follette's  Weekly,  Jan.  31,  1914. 
f  August. 

1  Payne  et  al.,  op.  cit.  63. 

2  Commissioner   Erickson,   Unpublished   address   on   ' '  Eeturns   for 
Interest  and  Profits. ' ' 


52       RAILROADS  AND  PUBLIC  UTILITIES 

Department  of  Labor  show  that  the  relative  prices  of  food 
had  risen  by  August,  1913,  to  166.5  and  that  the  purchas- 
ing power  of  money  had  correspondingly  declined  about 
forty  per  cent.  This  is  undoubtedly  an  important  factor 
to  be  considered  in  explaining  the  general,  yet  almost  im- 
perceptible, rise  in  interest  rates  in  the  past  few  years. 
The  facts  relating  to  the  increase  in  prices  and  the  decline 
in  the  value  of  the  dollar  are  presented  in  the  preceding 
table. 

Commissioner  Erickson's  investigations  indicate  that 
the  interest  rates  are  not  as  high  as  they  were  in  1890,  but 
that  the  increase  in  prices  during  the  past  few  years  has 
had  important  effects.  It  was  found  that  for  the  two-year 
period  from  1900  to  1902  there  was  a  decline  in  interest 
rates  followed  by  a  steady  increase  since  1904  that  is  still 
unchecked.  Bonds  of  ten  leading  railroads  were  selling 
on  a  2.72-per-cent  interest  basis  in  1891,  on  a  3.92-per-cent 
basis  in  1904  and  on  a  4.23-per-cent  basis  in  1912.  On  the 
New  York  exchange  the  percentage  of  bonds  bearing  less 
than  4  per  cent  is  rapidly  decreasing.  Quotations  from 
bond  houses,  illustrating  this  gradual  increase  in  the  cost 
of  capital,  might  be  multiplied  indefinitely.  The  volume 
of  business  transacted  has  been  greater  than  for  corre- 
sponding previous  periods.  This  has  stimulated  the  call  for 
capital  and  correspondingly  raised  the  rate  of  interest 
which  varies  with  the  demand.  The  financial  world  calcu- 
lates these  demands  with  precision.  Frank  A.  Vanderlip, 
president  of  the  National  City  Bank  of  New  York,  estimated 
in  1913  that  it  would  require  an  annual  expenditure  of 
$400,000,000  for  the  next  five  years  to  develop  the  electrical 
industry.  As  illustrating  the  magnitude  of  future  finan- 
cial problems  the  following  statement  by  him  is  worthy  of 
careful  consideration :  * 

1  Vanderlip,  Address  on  "Financing  Electricity,"  Sept.  5,  1913, 
at  Association  Island,  N.  Y.,  4. 


RATE  OF  RETURN  53 

When  the  matter  is  put  so  concretely  as  a  new  $8,000,000 
capital  every  week  for  five  years,  the  size  of  your  financial  prob- 
lem can  be  readily  grasped.  To  get  a  full  appreciation  of  the 
difficulties,  you  may  well  glance  outside  of  your  own  field,  how- 
ever, and  note  that  there  will  mature  within  the  next  five-year 
period  well  over  $1,000,000,000  of  steam  railroad  securities.  We 
may  well  note,  too,  that  railroad  development  in  the  last  five 
years  called  for  from  $2,500,000,000  to  $3,000,000,000  of  new 
capital,  and  I  would  say  that  there  is  every  reason  to  expect 
at  least  as  great  demands,  in  addition  to  the  refunding  opera- 
tions, in  the  next  five  years.  The  railroads  then  in  five  years  will 
need,  say,  $4,000,000,000  for  refunding  and  fresh  capital.  States 
and  municipalities,  should  they  take  no  more  new  capital  in  the 
next  five  years  than  they  have  in  the  last  five,  will  absorb  in  the 
neighborhood  of  $1,500,000,000  more. 

These  specific  and  general  factors  must  be  considered 
by  a  commission  in  fixing  a  rate  of  return  that  shall  be 
reasonable  to  the  utility  and  the  public,  and  yet  be  high 
enough  to  attract  capital  for  development.  Economic  laws 
governing  rates  of  interest  have  been  more  scientifically 
worked  out  than  those  limiting  the  rates  of  profit.  Dis- 
tinct profit  rewards  are  more  individualistic.  They  are 
based  more  particularly  on  the  skill  of  management:  gains 
due  to  change,  speculative  gains  from  risks  assumed,  re- 
turns from  shrewd  bargaining,  the  wages  of  management,1 
"and  other  conditions  of  this  nature  including  monopoly 
powers." 

Except  possibly  the  amount  allowed  for  wages  of  man- 
agement these  elements  are  self-explanatory.  Their  rela- 
tionship to  profits  have  been  presented  at  length  in  the 
case  of  the  State  Journal  Printing  Company,  et  al.,  v.  The 
Madison  Gas  &  Electric  Company,  which  deserves  a  careful 
perusal  for  a  more  complete  understanding  of  the  factors. 

1  State  Journal,  op.  cit.,  637;  In  re  Fond  du  Lac  Water  Co.,  1910, 
5  W.  E.  C.  E.,  506,  897. 


54        RAILROADS  AND  PUBLIC  UTILITIES 

Excessive  general  office  salaries  are  considered  as  profits. 
The  Commission  favors  high-grade  service  but  does  not 
approve  of  salaries  for  management  or  superintendence 
that  are  not  commensurate  with  the  duties  performed. 
"When  no  *  more  is  paid  than  the  amount  that  is  sufficient 
to  insure  proper  and  efficient  service,  there  is  little  to  be 
said  regarding  the  salaries  paid,"  says  the  Commission  in 
discussing  the  relation  of  profits  to  the  wages  of  manage- 
ment. "If,  on  the  other  hand,  the  salaries  are  kept  at  an 
unreasonably  high  level  in  order  to  cover  up  earnings,  or 
for  some  other  reason  of  this  nature,  there  may  be  good 
ground  for  criticism."  It  further  holds,  however,  that 
"allowance  should  be  made  in  some  manner  for  special 
efficiency.  To  deny  this  is  to  take  away  one  of  the  greatest 
incentives  to  economy. ' ' 2 

As  a  general  proposition,  it  may  be  said  that  the  Wis- 
consin Commission  allows  a  rate  of  return  as  profit  and 
interest,  equal,  as  nearly  as  it  is  possible  to  ascertain,  to 
what  the  same  company  would  earn  under  similar  circum- 
stances in  competitive  conditions.  Its  views  are  thus 
summarized : 

In  a  general  way  the  reasonable  return  may  be  said  3  to  be 
that  rate  of  return  at  which  capital  and  business  ability  can  be 
had  for  development.  Theoretically  it  cannot  be  lower  than  this, 
for  in  that  case  no  capital  would  enter  the  field.  Under  free 
competition  it  could  not,  in  the  long  run,  be  higher  than  this 
figure,  for  if  it  was,  the  supply  of  capital  for  these  purposes 
would  be  increased  and  this  increase,  in  turn,  would  tend  to 
reduce  the  rate  of  profits  and  interest.     But  free  competition  is 

1  In  re  Joint  Application  Waupaca  El.  Lt.  if  E.  Co.,  and  Waupaca, 
1912,  8  W.  E.  C.  E.,  613,  841;  City  of  Janesville  v.  Janesville  Water 
Co.,  1911,  7  W.  E.  C.  E,,  647,  861. 

2  City  of  Milwaukee  v.  T.  M.  E.  E.  $  L.  Co.,  1912,  10  W.  E.  C.  E., 
242,  861. 

3  In  re  Menominee  $•  Marinette  Lt.  $  Tr.  Co.,  1909,  3  W.  E.  C.  E., 
793,  996. 


RATE  OF  RETURN  55 

out  of  the  question  in  the  case  of  such  utilities,  for  they  are  mo- 
nopolistic in  their  nature.  It  is  for  this  reason  that  in  the  case 
of  such  monopolies  the  term  "reasonable"  has  been  substituted  for 
the  conditions  otherwise  brought  about  through  competition. 
Since  competition  did  not  exist,  it  could  not  regulate,  hence  some 
other  regulating  force  had  to  be  resorted  to.  This  form  is  im- 
plied in  regulation  through  absolute  legislation,  and  this  regula- 
tion is  guided  by  what  is  reasonable  under  the  circumstances. 
To  determine  what  is  reasonable  in  any  given  case  is  a  matter 
of  investigation  and  judgment. 

Plants  that  will  not  yield  returns  under  such  condi- 
tions are  not  allowed  a  profit.  "Undoubtedly  the  utility 
is  entitled  to  a  reasonable  return  upon  the  value  of  its 
property,"  comments  the  Commission  in  one  case,1  "but 
if  the  attempt  to  enforce  rates  which  will  yield  such  a 
return  is  to  lead  to  a  decrease  in  the  number  of  customers 
and  resulting  decrease  in  revenues,  any  theories  as  to 
the  proper  return  on  property  must  give  way  to  the  prac- 
tical situation. ' '  Public  interests  are  placed  above  private 
interests.2 

Under  normal  circumstances,  the  Commission  allows  the 
following  rates,  which  include  both  interest  and  profits: 

Railroads about  7  per  cent 

Gas  works about  7  per  cent 

Street  railways about  7 . 5  per  cent 

Water  works 6  to  7  per  cent 

Electric  plants 7.5  to  8  per  cent 

Telephone  companies 7 . 5  to  8  per  cent 

Both  railroad  and  utility  managers  charge  that  such 
returns  are  "niggardly."  Interest  rates  alone  average 
about  5  per  cent,  leaving  but  a  narrow  margin  for  actual 
profit.  Under  these  allowances,  however,  new  capital  has 
entered  the  field  and  the  enterprises  regulated  have  devel- 

1  In  re  Application  Oconto  Water  Supply  Co.,  1911,  7  W.  R.  C.  R., 
556,  557,  861. 

2  Rio  River  Land  Co.  v.  Upham  Mfg.  Co.,  1901,  1  W.  R.  C.  R.,  754. 


56       RAILROADS  AND  PUBLIC  UTILITIES 

oped  at  a  normal  ratio  with  other  states.  What  the  future 
may  bring  in  the  way  of  increases  or  decreases  of  the 
rate  of  return  cannot  be  foretold  until  the  economic  facts 
themselves  have  appeared.  The  application  of  the  princi- 
ples to  these  facts  will  then  show  what  is  the  ' '  reasonable ' ' 
rate  of  return  under  the  conditions  then  existing. 


CHAPTER  V 

STANDARDIZATION    OF   SERVICE 

The  Wisconsin  law  requires  and  the  Commission  insists 
that  the  first  duty  of  a  utility  is  to  furnish  adequate  service, 
even  though  a  poorer  class  of  service  could  be  supplied  at 
a  lower  rate.  After  service  conditions  have  been  improved, 
rate  questions  are  considered.  Poor  service  is  uneconomical 
to  the  consumer.  It  is  the  source  of  a  majority  of  the  com- 
plaints against  a  utility. 

That  the  railroads  and  public  utilities  may  better  under- 
stand the  character  of  the  service  required,  definite  service 
rules  have  been  published  from  time  to  time.  Conformity 
with  this  "code  of  morals"  is  enforced  by  the  Commission. 
With  steam  and  electric  railways  and  water  works  the 
service  is  maintained  at  a  fair  level  of  efficiency.  Com- 
plete standards  for  electric  and  gas  service  were  promul- 
gated 1  by  the  Commission  on  July  24,  1908,  following  the 
provisions  of  the  Public  Utility  Law.2  After  five  years  of 
administration  these  were  improved  and  announced  in 
revised  form,3  August  9,  1913.  Service  rules  for  telephone 
companies  4  were  issued  on  August  13,  1914,  after  a  public 
hearing  attended  by  representatives  of  nearly  all  of  the 

1  In  re  Standards  for  Gas  and  Electric  Service,  2  W.  R.  C.  R.,  632. 

1  Sec.  1797m-23,  ch.  499,  Laws  of  1907. 

8  In  re  Standards  for  Gas  and  Electric  Service,  12  W.  R.  C.  R., 
No.  U-233. 

*In  re  Investigation  on  Motion  of  the  Commission  of  Standards 
for  Telephone  Service  in  the  State  of  Wisconsin,  15  W.  R.  C.  R.,  No. 
U-339. 

57 


58       RAILROADS  AND  PUBLIC  UTILITIES 

telephone  companies  operating  in  the  state.  The  announced 
standards  of  service  are  enforced  through  a  system  of 
constant  inspection  and  supervision  by  the  Commission's 
staff.  For  this  purpose  the  state  is  divided  into  districts, 
in  each  of  which  a  traveling  representative  makes  daily 
service  tests  and  reports  conditions  to  the  Commission. 
Inadequacies  are  then  reported  to  the  utility  with  direc- 
tions for  improvements.  Refusal  to  comply  would  result 
in  the  assessment  of  the  heavy  penalties  provided  by  the 
law. 

Because  Wisconsin  was  one  of  the  first  states  to  fix 
definite  standards  for  public  utility  service  and  the  very 
first  to  include  more  than  two  or  three  of  the  elements 
that  make  up  adequate  service,  its  original  investigation  is 
of  great  importance.  It  covered  a  study  of  the  require- 
ments in  various  countries,  states  and  cities,  with  a  com- 
prehensive investigation  of  the  service  furnished  by  Wis- 
consin utilities.  As  illustrating  the  wide  variety  of  condi- 
tions, the  record  of  tests  made  upon  various  gas  plants 
in  the  state  showed  ' '  a  range  of  heating  values  between  the 
limits  of  193  and  1,050  B.T.U.  per  cubic  foot,  the  majority 
of  tests  showing  a  value  of  about  600."  When  the  gas 
and  electric  standards  were  first  announced  few  of  the 
plants  were  able  to  comply  with  them  without  making 
additions  and  improvements.  Hundreds  of  thousands  of 
dollars  were  expended  by  both  the  private  and  municipal 
utilities  in  developing  their  plants  to  give  the  efficiency 
of  service  required.1 

RAILROAD    SERVICE 

In  the  case  of  steam  railroads,  questions  of  service 
involve  the  close  connection  at  junction  points  between  the 
same  and  different  systems;  the  stoppage  of  a  sufficient 

1  John  H.  Roemer,  Address  at  Kansas  City,  Nov.  16,  1911,  14. 


STANDARDIZATION  OF  SERVICE  59 

number  of  trains  at  the  smaller  stations;  the  cleanliness, 
convenience  and  sanitation  of  the  cars  and  depots ;  the 
equitable  distribution  of  freight  cars  among  shippers  at 
all  points,  and  the  equipment  of  the  system  with  improved 
safety  devices  to  prevent  needless  accidents.  The  latter 
involves  the  question  of  protecting  dangerous  crossings 
and  the  separation  of  grades.  The  yards,  bridges,  tracks 
and  rolling  stock  of  the  roads  are  under  constant  inspection 
by  members  of  the  Commission's  engineering  staff,  that 
defects  may  be  eliminated  and  the  handling  of  both  freight 
and  passengers  facilitated  through  the  adoption  of  better 
methods. 

Each  of  these  separate  problems  requires  intricate  de- 
tails of  study  and  investigation.  The  consideration  of  the 
inadequacy  of  station  facilities,  for  example,  involves  the 
study  of  the  population  served,  the  approximate  cost  of 
the  improvement,  the  possible  resulting  increase  of  busi- 
ness and  other  operating  factors.  If  the  service  and  con- 
venience of  the  public  require  it,  the  Commission  may 
even  order  the  construction  of  union  passenger  stations.1 
Such  questions  are  usually  decided  as  the  result  of  a  formal 
complaint  and  hearing.  Again,  under  the  provisions  of  the 
spur  track  law,  the  constitutionality  of  which  has  been 
sustained  by  the  state  and  federal  courts,  the  Commission 
may  order  the  construction  of  a  track,  not  more  than  three 
miles  in  length,  to  an  industrial  plant,  if  the  improvement 
is  indispensable  to  business  and  is  not  dangerous  to  the 
public.  Other  service  matters  considered  are  the  inspec- 
tion of  block  signal  and  interlocking  plants,  the  inspection 
of  tracks,  and  the  investigation  of  delays,  accidents  and 
wrecks.  These  problems  arising  in  industrial  centers  lead 
to  many  complaints,  a  majority  of  which  are  settled  without 
formal  orders. 

'Ch.  69,  Laws  of  3913;   also  Howard  Teasdale  v.  C.  M.  4~  St.  P. 
B.  Co.,  and  C.  #  N.  W.  B.  Co.,  1914,  13  W.  K.  C.  R.,  No.  K-805. 


60        RAILROADS  AND  PUBLIC  UTILITIES 


STREET    AND    INTERURBAN    RAILWAYS 

The  most  complete  investigations  of  the  electric  railway 
service  have  been  conducted  on  the  lines  in  the  city  of 
Milwaukee,  where  the  congested  condition  of  downtown 
districts  raised  problems  that  did  not  menace  the  smaller 
cities  of  the  state.  Studies  of  service  in  all  of  the  cities 
have  been  made.  These  have  culminated  in  orders  for 
the  rerouting  of  cars,  the  maintenance  of  faster  schedules, 
limitations  of  loading,  the  granting  of  permission  to 
carry  folded  baby  cabs  on  the  rear  of  cars,  and  other  serv- 
ices. 

Investigations  of  this  character  usually  involve  observa- 
tions by  inspectors  taken  simultaneously  at  different  parts 
of  the  system,  together  with  conditions  and  difficulties  at 
transfer  points.  Generally  these  observations  are  made 
secretly.  The  data  gathered  includes  the  number  of  pas- 
sengers traveling,  the  crowding  of  cars,  the  number  of 
'transfers  issued,  the  speed  and  interruptions  of  service  that 
cause  delay.  When  this  material  is  assembled  and  charted 
for  successive  days  and  for  different  hours,  the  weaknesses 
in  the  existing  arrangements  appear  in  sufficiently  definite 
form  to  permit  analysis  and  remedy.  At  Madison,  Superior 
and  Milwaukee  these  investigations  have  resulted  in  the 
complete  rerouting  of  cars,  the  ordering  of  additional 
equipment  and  more  cars  for  service  at  the  rush  periods  in 
the  morning,  noon  and  evening. 

Under  the  law  *  passed  by  the  1913  legislature  the  Com- 
mission is  given  power  to  require  the  joint  use  of  tracks 
of  different  companies  at  a  compensation  to  be  determined 
by  it,  that  the  public  may  be  adequately  served. 

— ~       i 

1  Ch.  62,  Laws  of  1913 ;  also  T.  M.  E.  B.  $  L.  Co.  v.  Milwaukee 
Northern  Bailway  Co.,  1913,  13  W.  R.  C.  R.,  268,  and  T.  M.  E.  B.  $ 
L.  Co.  v.  Chicago  $  Milwaukee  Elec.  B.  Co.,  1913,  13  W.  R.  C.  R., 
299. 


STANDARDIZATION  OF  SERVICE  61 

WATER   WORKS 

Purity  of  water  supply,  adequacy  of  the  source,  the 
pressure  on  the  mains  for  domestic,  industrial  and  public 
service,  the  accuracy  of  meters,1  are  among  the  water-works 
problems  that  demand  the  attention  of  the  Commission. 
About  80  per  cent  of  the  water  works  in  the  state  are 
municipal  plants.  Fire  tests  made  in  a  number  of  cities 
have  resulted  in  the  ordering  of  immediate  plant  improve- 
ments, that  adequate  fire  protection  might  be  maintained. 
Because  of  polluted  water  it  has  been  found  necessary  to 
order  a  change  in  the  source  of  supply.2  The  numerous 
decisions  of  the  Commission  affecting  water  works  show 
that  sometimes  it  has  been  necessary  to  order  plants  to 
extend  service  to  the  curb  line  of  lots  and  in  other  cases 
to  build  mains  into  unsupplied  districts,3  to  obviate  disaster 
in  residence  sections  in  case  of  fire.  No  general  standards 
for  heating  plants  have  ever  been  promulgated,  although 
individual  features  have  received  attention  from  time  to 
time  and  assistance  has  been  rendered  where  rules  govern- 
ing heating  service  were  being  drawn  up  by  utilities. 

ELECTRIC   LIGHTING    SERVICE 

The  requirements  for  gas  and  electric  service  are  more 
specific.  In  determining  the  electric  standards,  the  Com- 
mission formulated  rules  which  did  not  lay  stress  on  any 
one  element  to  the  neglect  of  others ;  nor  are  the  standards 
so  high  as  to  compel  the  smaller  lighting  utilities  to  demand 
high   rates   because   of   the   requirements.4      The    revised 

1  In  re  Investigation  Hudson  Municipal  Water  Works,  1908,  3 
W.  R.  C.  R.,  141. 

2  Torrance  et  al.  v.  La  Crosse  Board  of  Water  Commissioners, 
1911,  7  W.  R.  C.  R.,  39,  40,  85. 

3  City  of  Janesville  v.  Janesville  Water  Co.,  1911,  7  W.  R.  C.  R., 
707,  708,  884;  also  Beloit,  Madison  <$r  Bake  Mills  cases. 

4  In  re  Standards,  etc.  Aug.  9,  1913,  9. 


62       RAILROADS  AND  PUBLIC  UTILITIES 

standards  of  August  9,  1913,  direct  electric  companies  to 
test  meters  on  installation  and  at  stated  intervals  there- 
after, depending  upon  the  type  and  characteristics  of  the 
meter.  During  any  six  months'  period,  consumers  who 
believe  their  meters  are  inaccurate  may,  on  application, 
have  retests  made  by  the  utility  without  expense.  If  not 
satisfied  with  the  utility's  test,  or  if  they  so  prefer,  the 
Commission's  engineering  staff  will  make  a  test  upon  ap- 
plication, for  which  a  nominal  fee  is  charged.  If  the  meter 
is  slow  or  correct,  the  fee  is  paid  by  the  consumer.  If  fast 
beyond  the  allowable  limit  of  4  per  cent,  the  utility  pays 
the  expense.  All  companies  are  required  to  have  suitable 
meter-testing  equipment,  and  to  keep  complete  records  of 
all  tests  made.  Bills  rendered  to  customers  shall  designate 
the  reading  of  the  meter  at  the  beginning  and  end  of  the 
period  for  which  it  is  rendered. 

In  addition  to  the  meter  inspection,  which  some  cities 
maintained  before  standards  were  promulgated  for  the 
state,  the  Commission  requires  each  company  to  keep  a 
record  of  interruptions  in  service  and  to  make  reasonable 
efforts  to  eliminate  interruptions,  and  whenever  they  occur, 
service  must  be  reestablished  with  the  shortest  possible 
delay.  It  defines  as  an  interruption  a  period  of  over  30 
seconds  during  which  the  voltage  on  the  circuit  is  less 
than  80  per  cent  of  its  normal  value.  The  rules  require 
that  an  operating  log  be  kept  in  each  plant.  By  the 
Commission  following  these  various  records  closely,  the 
improvement  made  in  the  service  furnished  by  many  utili- 
ties has  been  marked.  Another  rule  provides  that  the 
voltage  supplied  at  any  consumer's  cut-out  shall  remain 
constant  within  prescribed  limits.  The  company  is  also 
required  to  make  frequent  inspection  of  incandescent  lamps, 
and  to  inform  each  of  its  consumers  "as  to  the  conditions 
under  which  efficient  service  may  be  secured  from  its 
system. ' ' 


STANDARDIZATION  OF  SERVICE  63 

At  present  there  are  over  350  electric  lighting  plants 
whose  service  is  regularly  inspected  by  members  of  the 
Commission's  staff.  These  inspectors  carry  testing  equip- 
ment and  take  graphic  records  of  voltage  over  the  distribu- 
tion systems,  calibrate  the  company's  standard  instrument, 
and  supervise  the  testing  of  consumers'  meters  and  the 
renewals  of  incandescent  lamps.  After  the  recording  in- 
struments have  run  over  night,  the  inspector  visits  the 
plant  to  look  over  the  meter  and  station  records.  A  com- 
plete report  of  all  information  gathered  is  then  sent  to 
the  main  office  at  Madison,  together  with  the  original  record 
taken  by  means  of  the  recording  instruments.  The  utility 
is  in  turn  notified  by  the  Commission  of  the  necessary 
changes,  and  these  suggestions  are  followed  up  by  later 
inspection  to  see  that  the  standards  are  enforced.  In  nearly 
all  plants  sufficient  improvements  were  made  without  sum- 
moning the  operators  before  the  Commission  to  explain 
their  derelictions. 

As  a  result  of  this  inspection  and  standardization  of 
service  great  improvements  in  voltage  conditions  have  taken 
place  in  the  electric  utilities  of  the  state.  When  the  law 
was  enacted,  out  of  238  plants  then  furnishing  service  to 
75,000  consumers,  only  about  15,  serving  15,000  users,  fur- 
nished satisfactory  voltage.  Inadequate  voltage  service 
was  given  to  60,000  consumers.  At  least  forty  plants  have 
since  been  generally  overhauled,  besides  the  general  me- 
chanical improvements  made  in  other  electric  utilities. 
Probably  the  greatest  improvement  has  been  brought  about 
by  the  additional  care  with  which  utilities  have  been  oper- 
ated since  these  matters  have  been  emphasized.  The  Com- 
mission's inspection  staff  estimates  that  practically  all  of 
the  present  100,000  electric  consumers  in  the  state  "are 
now  receiving  satisfactory  electric  service  as  measured  by 
Wisconsin  standards.  In  this  connection  it  must  be  borne 
in  mind  that  the  state  regulation  of  voltage  is  new,  and 


64       RAILROADS  AND  PUBLIC  UTILITIES 

that  work  similar  to  this  in  scope  has  never  before  been 
attempted." 

When  the  standards  were  first  announced,  less  than 
a  dozen  companies,  serving  approximately  12,000  consum- 
ers, were  inspecting  their  meters.1  Practically  every  plant 
in  the  state  now  has  instruments  for  doing  this  work. 

The  engineering  staff  has  estimated  the  financial  gains 
to  the  public  as  a  result  of  standards  and  inspections  as 
follows : 

Assuming  that  the  improvement  in  voltage  regulation  brought 
about  by  enforcing  the  rules  of  service  has  been  worth  5  per  cent 
of  the  bills  to  the  other  60,000  consumers  now  getting  good  ser- 
vice regulation,  and  that  the  remaining  40,000  have  received  a  1 
per  cent  benefit  due  to  raising  the  standard  of  regulation,  shows 
a  saving  of  $122,400  per  annum  on  the  basis  of  average  bills  of 
$3.00  per  month.  At  present  practically  all  electric  meters  are 
tested  systematically;  at  least  60,000  are  now  tested  which  did 
not  receive  such  tests  five  years  ago.  If  this  is  worth  1  per  cent 
to  the  consumer,  the  total  value  of  the  work  has  been  $21,600  , 
per  annum.  This  gives  a  total  of  $144,000  saved  to  the  electric 
lighting  consumers  of  the  state  each  year  because  of  the  regu- 
lation of  electric  service. 

GAS    SERVICE 

The  gas  standard  requirements  are  similar  to  those 
which  were  promulgated  simultaneously  for  electric  plants. 
No  gas  meter  is  allowed  to  remain  in  service  unless  it 
registers  within  2  per  cent  correct.  Meters  must  be  tested 
at  installation  and  may  remain  in  service  a  maximum  of 
four  years  between  tests.  Request  and  referee  tests  are 
made  on  application  under  similar  rules  as  applied  to  elec- 
tric companies. 

The  monthly  average  for  the  heating  value  of  gas  shall 
1  Report  of  inspectors  to  Commission  (unpublished),  Oct.  18,  1911. 


STANDARDIZATION  OF  SERVICE  65 

not  be  less  than  600  British  thermal  units  per  cubic  foot, 
and  the  minimum  shall  never  fall  below  550.  These  tests 
are  to  be  made  anywhere  within  a  radius  of  one  mile  from 
the  distribution  plant.  Large  plants  with  an  annual  out- 
put of  20,000,000  cubic  feet  of  gas,  or  over,  shall  be 
equipped  with  standard  instruments  for  measuring  heat 
value,  and  shall  make  tests  at  least  three  days  a  week. 
Because  no  gas  is  utilized  in  open-flame  burners  in  Wiscon- 
sin a  candle-power  standard  is  not  considered  necessary. 
Another  rule  prescribes  that  the  gas  pressure  shall  be  such 
as  to  support  from  two  to  six  inches  of  water  "and  the 
maximum  pressure  at  any  outlet  on  the  system  shall  never 
be  greater  than  double  the  minimum  pressure  at  that  out- 
let."  The  purity  of  gas  is  controlled  by  allowing  not 
more  than  thirty  grains  of  total  sulphur  for  every  one 
hundred  cubic  feet  and  not  more  than  a  trace  of  sul- 
phuretted hydrogen.  A  complete  record  of  all  complaints 
and  their  remedy  shall  be  kept  by  the  company  open  to 
public  inspection. 

The  service  of  these  plants  is  regularly  inspected  by  the 
Commission's  staff.  In  addition  to  the  regular  gas  plants 
there  are  a  number  of  gasoline  and  acetylene  plants  that 
require  occasional  visits  for  assistance  in  operating  matters. 

The  thirty-six  regular  gas  plants  in  the  state  furnish 
service  for  approximately  125,000  consumers.  In  the  six 
years  that  standards  and  state  inspections  have  been 
effective,  the  heat  value  of  the  eleven  plants  has  increased 
more  than  10  per  cent.  In  one  case  it  has  increased  30 
per  cent.  Two  plants  have  increased  heat  value  between 
5  and  10  per  cent,  and  five  plants  between  2  and  5  per 
cent.  The  pressure  was  inadequate  in  twelve  plants.  In 
thirteen  cities  having  gas  service  no  systematic  meter  in- 
spection was  carried  on.  A  conservative  estimate  prepared 
by  the  engineering  and  inspection  staffs  on  October  18, 
1911,  for  each  city  individually,  showed  a  total  saving  to 


66       RAILROADS  AND  PUBLIC  UTILITIES 

the  gas  consumers  of  the  state  of  $45,000  per  annum a 
as  a  result  of  standardization  of  service. ' 


TELEPHONE    SERVICE 

Definite  standards  of  telephone  service  were  first  out- 
lined when  a  member  of  the  Commission 's  engineering  staff 
presented  a  tentative  set  of  rules  2  in  the  state  convention 
of  telephone  men  held  in  Madison  in  February,  1913.  After 
these  preliminary  rules  were  discussed  and  revised,  two 
public  hearings  on  the  subject  were  conducted  by  the  Com- 
mission and  as  a  result  a  formal  order  was  issued  August 
13,  1914,  establishing  standards  of  telephone  service. 
These  rules  require  that  equipment  and  lines  shall  be 
properly  maintained;  that  "cross-talk"  and  noise  unrea- 
sonably interfering  with  the  service  shall  be  eliminated 
and  that  lines  shall  not  be  overloaded  by  connecting  more 
subscribers  to  a  single  line  than  can  be  adequately  served. 
Telephone  utilities  are  required  to  supply  lines  for  through 
traffic  between  cities  and  villages,  to  which  few  if  any 
subscribers  are  permanently  connected.  The  companies 
are  required  to  make  such  tests  and  inspections  as  are 
necessary  to  satisfy  the  Commission  and  the  public  that 
they  are  complying  with  the  rules.  Each  company  is  re- 
quired to  have  sufficient  switchboard  capacity  and  operat- 
ing force  and  to  make  reasonable  provision  to  meet  emer- 
gencies. Ten  seconds  is  given  as  the  period  within  which 
90  to  94  per  cent  of  all  calls  must  be  answered  by  telephone 
operators,  the  larger  exchanges  answering  at  least  94  per 
cent  within  that  time.  Directories  are  to  be  revised  an- 
nually or  semi-annually,  depending  upon  the  size  of  the 

1  These  facts  are  taken  from  a  report  of  inspectors  to  Commission 
(unpublished). 

2  J.  N.  Cadby,  "Definite  Standards  of   Telephone  Service,"  Ad- 
dress before  Wisconsin  State  Telephone  Association,  Feb.  12,  1913. 


STANDARDIZATION  OF  SERVICE  67 

exchange  and  the  number  of  changes  taking  place.  The 
directories  must  contain  instructions  and  rules  governing 
the  use  of  local  and  toll  service  sufficient  to  inform  all  users 
of  their  rights  and  obligations.  Although  no  definite  rules 
governing  toll  service  are  included  a  number  of  suggestions 
are  given  which  should  serve  as  a  guide  in  toll  service 
operation. 

The  routine  inspection  in  connection  with  these  rules 
is  to  be  carried  on  in  the  manner  similar  to  that  employed 
before  the  rules  were  adopted.  As  in  the  case  of  electric 
and  gas  service,  inspections  heretofore  have  been  made 
upon  complaint  and  since  1910,  regular  inspections  by  the 
Commission's  staff  have  been  conducted  annually  at  some 
forty-two  of  the  larger  exchanges,  serving  about  82,000 
subscribers.  A  regular  telephone  inspector  makes  from 
thirty  to  one  hundred  inspection  calls  from  different  tele- 
phones before  reporting  to  the  utility 's  office  to  check  over 
the  service  records.  Every  inspector  and  representative  of 
the  Railroad  Commission  assists  in  this  work  by  carrying 
a  split  second  stop  watch  that  records  the  time  required 
to  get  the  operator  and  the  party.  Regular  reports,  made 
to  the  Commission 's  office  at  Madison,  show  such  irregulari- 
ties as  wrong  numbers  given,  poor  supervision  of  calls,  in- 
distinct transmission,  and  any  complaints  of  subscribers. 
The  Commission  immediately  informs  the  company  of  the 
results  of  the  inspection  with  suggested  changes  to  secure 
improved  service.  The  Commission's  suggestions  to  the 
utility  are  accompanied  with  blue-print  curves  showing  the 
results  of  all  former  inspections  of  the  plant  with  a  graphic 
comparison  of  the  service  furnished  by  telephone  utilities  in 
other  cities  of  the  same  class.  Unless  corrections  are  made 
within  reasonable  time,  the  Commission  issues  a  formal  or- 
der against  the  company. 

State  supervision  is  becoming  effective.  Tests  during 
the  fiscal  year  ending  June  30,  1912,  in  thirty-one  cities  of 


68       RAILROADS  AND  PUBLIC  UTILITIES 

the  state  show  that  it  required  an  average  time  of  4.5  sec- 
onds to  get  the  operator,  while  the  minimum  was  3.2  sec- 
onds, and  the  maximum  11.7  seconds. 

The  requirements  of  the  Commission  have  resulted  in 
extensive  telephone  improvements  in  the  state.  Many  of 
the  lines  have  been  changed  from  grounded  to  metallic  cir- 
cuits at  great  expense,  occasionally  necessitating  an  in- 
crease of  rates.  Of  thirty-two  orders  of  the  Commission 
authorizing  public  utility  rate  increases,  in  the  five  years 
up  to  August  20,  1912,  twenty  related  to  telephone  plants 
where  the  advance  was  necessary  because  of  the  better 
grade  of  service  furnished. 


CHAPTER   VI 

UNIFOEM    ACCOUNTING 

In  considering  the  matter  of  public  utility  regulation 
the  necessity  of  proper  accounting  cannot  be  overempha- 
sized. It  is  recognized,  however,  that  public  service  com- 
pany accounting  as  a  science  had  been  given  but  little  con- 
sideration before  the  beginning  of  the  twentieth  century. 
This  was  largely  due  to  the  fact  that  the  interests  before 
that  time  centered  primarily  around  the  cash  account,  and 
the  records  were  naturally  kept  in  such  a  manner  that  the 
honesty  of  officials  and  employees  might  be  shown.  Ac- 
counting with  these  purposes  in  view  meant  a  record  sys- 
tem that  would  show  receipts  and  disbursements,  with  cer- 
tain checks  so  as  to  prevent  misuse  of  the  revenues.  While 
this  is  an  important  feature  in  any  system  of  accounts, 
it  does  not  furnish  the  information  along  accounting  lines 
as  required  at  the  present  time.  Accounting  as  understood 
to-day,  and  to  be  of  the  greatest  service,  must  give  a  com- 
prehensive idea  of  the  condition  of  the  business.  The  pres- 
ent conception  of  accounting  is  well  brought  out  by  William 
Morse  Cole  in  his  book,  ' '  Accounts,  Their  Construction  and 
Interpretation, "  a  in  which  he  says : 

"Accounting,  in  the  sense  in  which  it  is  used  here,  is 
scientific  analysis  and  record  of  business  transactions.  It 
attempts  to  tell  about  every  transaction  everything  that 
can  be  of  service  when  known.  It  attempts  to  show  the 
result  of  every  effort,  the  cost  of  every  return.     Only  by 

1  Pp.  4-5. 

69 


70        RAILROADS  AND  PUBLIC  UTILITIES 

its  aid  can  satisfactory  comparison  be  made  of  different  en- 
terprises and  different  methods." 

In  manufacturing  industries  the  necessity  of  having  a 
comprehensive  knowledge  of  the  cost  of  production  is  now 
well  recognized.  Heretofore  increases  in  expenses  were 
met  by  an  expansion  or  increase  of  sales.  Competition,  of 
late,  however,  has  forced  men  to  realize  that  increases  in 
sales  do  not  necessarily  continue  to  give  profits  in  propor- 
tion to  the  extra  cost  involved  in  putting  the  products  on 
the  market.  The  only  logical  solution  under  these  competi- 
tive conditions  is  to  economize  in  the  cost  of  production. 
Under  normal  competitive  conditions,  cost  more  than  any 
other  element  fixes  the  price  or  determines  the  profits  to  be 
made.  A  knowledge  of  the  costs  of  the  various  articles 
produced  has  now  become  imperative,  and  this  demands  a 
change  from  the  old  to  the  present  system  of  accounting. 

The  importance  of  proper  accounting  for  public  utili- 
ties can  be  more  fully  realized  when  it  is  remembered  that 
regulation  of  public  utilities  has  for  one  of  its  main  func- 
tions the  determination  of  what  constitutes  a  reasonable 
rate  of  return  to  the  utilities.  It  is  obvious  that  a  public 
body  cannot  determine  what  constitutes  a  fair  rate  of  re- 
turn without  having  at  its  disposal  ample  information  as  to 
the  revenues  and  expenses  of  the  company.  Such  infor- 
mation must  not  only  be  a  true  representation  of  the  af- 
fairs of  the  utility,  but  must  also  be  presented  in  such 
form  that  it  may  be  used  to  the  utmost  advantage. 

This  fact  was  recognized  by  those  who  drafted  the 
Public  Utility  Law  and  ample  powers  were  conferred  upon 
the  respective  commissions  for  prescribing  accounts  and 
records  suited  to  the  needs  of  regulation.  Section  1797m-8 
to  16,  inclusive,  of  the  Public  Utility  Law  of  Wisconsin, 
for  example,  gives  that  Commission  the  power  to  prescribe 
the  system  of  accounts  to  be  kept  and  in  addition  makes 
it  unlawful  for  utilities  to  keep  any  book  accounts,  papers 


UNIFORM  ACCOUNTING  71 

or  records  of  business  transacted,  other  than  those  pre- 
scribed or  approved  by  the  Commission.  The  wisdom  of 
conferring  this  power  upon  the  Commission  has  already 
been  demonstrated  by  the  results  of  its  operation.  This  is 
obvious  when  it  is  remembered  that  regulation  of  public 
utilities  to  be  effective  is  in  large  part  dependent  upon 
records  kept  in  such  a  way  that  the  results  of  operation 
and  the  true  condition  of  the  business  may  be  shown. 
This  end  could  not  be  accomplished  without  a  central  body 
controlling  the  accounting  practices. 

Without  strict  supervision  in  accounting  matters  diffi- 
culties are  found  along  the  following  lines : 

1.  Records  of  construction  are  not  kept  separately  from 
records  of  operating  expenses. 

2.  No  distinction  is  made  in  many  cases  between  re- 
pairs and  replacements. 

3.  In  municipally  owned  utilities  often  no  attempt  is 
made  to  keep  the  records  of  the  utility  separated  from 
those  of  the  general  business  of  the  city. 

4.  Even  where  the  expenses  of  operation  are  kept  dis- 
tinct from  other  items,  the  revenues  and  expenses  are  so 
improperly  classified  as  not  to  permit  of  cost  analysis. 

With  such  conditions  prevailing  in  the  accounting  prac- 
tices one  of  the  first  problems  confronting  the  public  utility 
commissions  after  their  organization  was  the  adoption  of 
a  system  of  accounts  which  would  afford  the  regulative 
agency  a  means  of  securing  the  information  necessary  for 
rate  regulation. 

The  Railroad  Commission  of  Wisconsin  was  one  of  the 
pioneers  in  working  out  a  complete  system  of  accounts  for 
utilities  designed  to  meet  the  demands  of  the  operating  men 
and  supply  the  information  for  effective  regulation.  After 
two  years  of  investigation  following  the  passage  of  the 
Public  Utility  Law  in  1907,  a  complete  system  of  account- 
ing and  reports  was  promulgated  applicable  to  all  of  the 


72       RAILROADS  AND  PUBLIC  UTILITIES 

utilities  of  the  state.  At  the  present  time  a  large  number 
of  states  have  commission  control  of  public  utilities  and 
have  adopted  accounting  schemes  for  the  various  utilities. 
It  is  worthy  of  note  that  these  systems  follow  the  general 
policies  laid  down  by  the  pioneer  states  in  this  work.  By 
discussing  the  accounting  schemes  adopted  by  the  "Wiscon- 
sin Commission,  therefore,  a  general  understanding  of  the 
public  utility  accounting  now  in  vogue  will  be  gotten.  The 
Wisconsin  system  is  based  upon  the  principles  of  cost 
accounting  on  a  uniform  plan. 

The  possibility  of  securing  uniformity  and  at  the  same 
time  of  adhering  to  good  accounting  practice  was  simplified 
by  building  the  classification  around  summary  double- 
entry  bookkeeping  forms.  By  following  this  policy  it  was 
possible  to  adopt  a  system  sufficiently  flexible  to  provide 
for  every  variety  of  operating  condition,  and  at  the  same 
time  meet  the  needs  of  the  smaller  as  well  as  the  larger 
utilities.  These  forms  are  three  in  number:  the  balance 
sheet,  the  income  statement  and  the  profit  and  loss  account. 
In  the  Wisconsin  classification,  the  last  two  have  been 
grouped  under  one  account  for  convenience  in  submit- 
ting reports  to  the  Commission. 

The  summary  accounts  in  these  forms  are  chosen  aloug 
cost  accounting  lines  so  that  the  small  utilities  are  allowed 
to  group  all  items  under  the  main  divisions  or  controlling 
accounts  without  subdivision  as  to  items,  and  for  the  larger 
utilities  the  summary  accounts  are  further  subdivided,  the 
extent  of  the  detail  depending  upon  the  size  of  the  utilities. 
Under  the  scheme  followed,  the  controlling  accounts  are 
maintained  from  the  small  Class  D  utility  to  the  large  Class 
A  utility. 

The  controlling  accounts  in  the  balance  sheet,  on  the 
one  hand,  showing  the  assets,  consist  of  property  and  plant, 
treasury  securities,  investments,  reserve  and  special  fund 
assets,  current  assets,  and  prepared  accounts,  and,  on  the 


UNIFORM  ACCOUNTING  73 

other  hand,  showing  the  liabilities,  consist  of  capital,  mort- 
gage, reserve,  current  and  accrued  liabilities.  The  excess 
of  the  assets  over  the  liabilities  under  proper  accounting 
conditions  should  show  the  undivided  surplus  in  the  busi- 
ness. 

These  accounts  form  the  main  structure  in  the  balance 
sheet  and  are  so  general  in  character  that  subdivisions  of 
the  main  accounts  provide  for  sufficient  flexibility  to  meet 
the  varying  operating  conditions. 

The  income  statement  is  purely  an  operating  statement 
and  follows  the  same  policy  in  providing  controlling  ac- 
counts outlined  above  for  the  balance  sheet.  In  this  state- 
ment the  summary  or  controlling  accounts  are  the  same 
for  the  small  as  for  the  larger  utilities  and  provide  that  the 
small  utilities  be  required  to  maintain  only  the  controlling 
accounts,  while  a  subdivision  of  each  of  these  accounts  is 
required  in  case  of  the  larger  operating  companies. 

The  accounting  arrangement  of  this  form  provides  a 
statement  of  the  operating  revenues,  then  the  operating 
expenses,  after  which  the  gross  income  is  shown.  This  is  a 
logical  step,  for  it  reveals  the  results  of  operation  after  all 
forms  of  operating  expenses  have  been  provided  for.  The 
deductions  from  gross  income  naturally  follow  next,  which 
shows  separately  the  costs  incurred  depending  upon  the 
manner  of  financing  the  business  as  revealed  by  the  lia- 
bility side  of  the  balance  sheet.  Next  in  order  comes  net 
income  or  the  profit  or  loss  for  the  period,  which  is  usually 
carried  to  form  number  three,  the  profit  and  loss  account, 
but  which  is  retained  as  part  of  the  income  statement  ac-. 
cording  to  the  Wisconsin  classification.  The  profit  and  loss 
account  as  the  final  form  is  intended  to  show  the  manner 
in  which  the  profits,  if  any  result  from  operation,  have 
been  disposed  of.  The  profits  may  be  used  in  the  declara- 
tion of  dividends  or  those  in  control  may  decide  to  use  all 
or  a  part  of  the  profits  in  building  up  the  business. 


74       RAILROADS  AND  TUBLIC  UTILITLES 

Information  disclosed  in  the  income  statement  outlined 
above  is  essential  in  the  matter  of  rate  regulation.  The 
widest  use,  however,  depends  upon  a  logical  arrangement  of 
the  controlling  accounts  in  conformity  to  the  principles  of 
cost  accounting.  This  situation,  it  appears,  has  been  suc- 
cessfully met  in  the  Wisconsin  classification. 

Turning  to  the  operating  revenues,  we  find  a  careful 
arrangement  of  the  revenues  among  the  different  branches 
of  service  furnished.  The  importance  of  this  arrangement 
cannot  be  fully  appreciated  until  a  question  of  rates  arises. 
It  is  then  desirable  to  know  how  much  each  class  of  service 
has  been  contributing  to  meet  the  cost  of  rendering  that 
class  of  service.  With  this  information  at  hand,  it  will  be 
possible  to  determine  within  reasonable  bounds  whether 
any  class  has  contributed  more  or  less  than  its  just  propor- 
tion of  the  revenues  of  the  utility. 

The  subdivision  of  operating  expenses  constitutes  the 
main  point  of  difference  among  those  who  have  given 
thought  to  uniform  classification.  It  appears  that  the 
grouping  of  expenses  should  be  determined  primarily  by 
the  purposes  to  be  attained  by  the  classification  and  the 
information  required  to  meet  that  purpose. 

From  the  viewpoint  of  cost  accounting,  it  seems  reason- 
able to  assume  that  the  purpose  should  be  to  determine 
cost.  This  has  been  the  assumption  upon  which  the  Wis- 
consin classification  has  been  built  up  and  these  general  ac- 
count groupings  have  been  widely  used  in  the  public  utility 
field.  It  is  appreciated  that  the  cost  of  service  principle 
has  not  been  universally  adopted  as  the  proper  basis  for 
determining  rates,  still  when  considered  from  the  stand- 
point of  cost  accounting  it  seems  highly  desirable  to  know 
the  costs  no  matter  what  policy  of  rate  regulation  is 
adopted.  Unless  this  policy  is  adhered  to,  it  appears  that 
the  classifications  are  contrary  to  the  accepted  policies  of 
cost  accounting. 


UNIFORM  ACCOUNTING  75 

Keeping  in  mind  the  importance  of  knowing  the  cost  of 
furnishing  the  different  classes  of  service,  the  cost  account- 
ing principles  were  followed  in  grouping  the  operating  ex- 
penses as  far  as  practical  along  the  successive  steps  in  fur- 
nishing the  service,  while  those  which  are  overhead  and 
cannot  be  assigned  directly  are  placed  in  groupings  by 
themselves  so  that  when  the  question  of  rates  arises,  they 
may  be  distributed  over  the  various  services  according  to 
carefully  worked  out  principles  of  apportionment.  Ex- 
perience has  already  demonstrated  the  wisdom  of  adhering 
to  this  policy,  because  in  addition  to  making  possible  the 
determination  of  the  cost  of  the  various  classes  of  service 
the  system  has  met  with  unqualified  success  in  maintaining 
uniformity. 

The  advantages  and  importance  of  uniformity  in  ac- 
counting are  now  generally  recognized  and  it  is  being  widely 
adopted  in  public  and  quasi-public  undertakings.  The  ele- 
ment of  uniformity  is  important  to  public  service  commis- 
sions to  enable  them  to  interpret  the  revenues  and  expendi- 
tures of  a  plant  by  contrasting  them  with  other  utilities 
of  about  equal  size.  Efficiency  or  inefficiency  of  manage- 
ment can  most  readily  be  shown  through  comparisons,  item 
by  item.  In  rate  decisions  much  emphasis  is  put  upon 
"normal"  costs  of  operation  or  average  costs  of  operation. 
The  operating  expenses  upon  which  rates  are  based  must 
be  normal  and  reasonable.  The  reasonableness  of  the  op- 
erating expenses  of  a  given  utility  cannot  readily  be  de- 
termined from  the  records  of  any  individual  utility.  To 
determine  what  are  normal  operating  expenses  and  what 
degree  of  efficiency  in  operation  has  been  secured,  the  pos- 
sibility of  making  comparisons  is  important.  Whether  or 
not  the  rates  of  a  particular  utility  are  reasonable  cannot 
be  judged  from  the  amount  of  yearly  profits.  The  total 
profit  of  a  utility  may  not  be  excessive,  but  still  the  con- 
sumers as  a  whole  may  be  treated  unjustly,  due  to  exces- 


76       RAILROADS  AND  PUBLIC  UTILITIES 

sive  operating  expenses  caused  by  inefficient  management. 
Whether  or  not  a  particular  utility  is  being  operated  effi- 
ciently can  best  be  determined  by  comparing  its  costs  with 
other  utilities  producing  the  same  product  and  operating 
under  similar  conditions. 

In  order  to  make  the  most  satisfactory  study  of  effi- 
ciency, the  different  costs  must  be  expressed  in  terms  of 
standard  units.  A  study  of  unit  costs  is  made  possible 
under  a  uniform  accounting  arrangement.  By  ' '  unit  costs ' ' 
is  meant  the  cost  of  some  one  process  or  step  in  the  pro- 
duction process  reduced  by  some  suitable  division.  Thus, 
for  a  water  utility,  the  commonest  unit  of  expense  is  the 
gallon;  in  a  gas  utility,  cubic  foot;  and  in  the  electric 
utility,  the  kilowatt  hour.  Of  course,  many  other  units 
for  the  measurement  of  costs  are  possible  and  are  used,  such 
as  miles  of  main,  number  of  meters,  etc. 


Municipal  Water  Utilities — Class  A 

Detailed  and  Total  Operating  Expenses  in  Dollars  per  Million  Gallons 
Pumped  for  Year  Ending  June  30,  1912 


Location 
of  company 

Million 
gallons 
pumped 

Total 
pumping 

Total 
distribu- 
tion 

Total 
commercial 

Total 
general 

Total 
undistrib- 
uted 

Total 

operating 

expenses 

Appleton 

513 

730 

1,161 

1,025 

688 

332 

17,024 

1,121 

304 

264 

841 

$16.58 
7.80 
11.50 
15.91 
38.21 
19.51 
6.69 
11.52 
25.25 
54.59 
12.64 

$2.85 
5.18 

•3.89 
5.05 
6.86 
5.90 
3.66 
2.62 
6.99 

27.47 
2.07 

$0.62 
2.12 
1.21 

.39 
4.50 

.38 
3.32 

.33 
2.23 

.33 

$1.75 
1.31 
1.23 
.84 
2.14 
1.88 
1.34 
2.54 
4.35 
7.38 
1.18 

$0.75 
.55 
.17 
.34 
.61 
.77 
.90 
1.17 
.86 

.38 

$22.15 

Eau  Claire 

Kenosha 

16.96 
18.00 

La  Crosse 

Madison 

22.53 
52.32 

Manitowoc 

Milwaukee 

Sheboygan 

Waukesha 

Wausau 

28.44 
15.91 
18.18 
37.45 
91.67 
16.60 

Average 

1,495 

$20.94 

$5.53 

$1.85 

$6.05 

$0.89 

$35.32 

UNIFORM  ACCOUNTING  77 

The  preceding  table  taken  from  the  records  of  the  Com- 
mission illustrates  the  importance  of  such  uniform  unit 
cost  comparisons. 

This  table  compiled  from  uniform  records  shows  not 
only  the  total  cost  per  million  gallons,  but  the  expense  of 
each  successive  step,  as  "pumping,"  "distribution,"  etc. 
Several  of  these  plants  show  expense  costs  above  the  aver- 
age. For  one  plant  the  total  cost  per  million  gallons  of 
water  pumped  is  $91.67,  and  in  another  $52.32,  while  the 
normal  cost,  according  to  other  plants,  is  approximately 
$25.00.  Considering  these  costs  in  detail,  in  the  first  in- 
stance, the  total  "pumpage  costs"  and  the  total  "distribu- 
tion costs"  are  above  normal,  while  in  the  second  instance 
costs  appear  normal,  except  for  "total  pumpage."  These 
figures  show  the. use  of  comparative  unit  costs.  Although  it 
would  be  unfair  to  assume  immediately  that  these  plants 
were  being  operated  inefficiently,  these  figures  do  show 
along  what  lines  a  careful  investigation  of  the  plants  should 
proceed.  Such  comparisons  are  of  importance  because  they 
provide  a  means  through  which  apparently  abnormal  costs 
can  be  detected  and  show  just  where  careful  investiga- 
tions as  to  cost  are  necessary.  Comparisons  of  this  nature 
are  not  only  possible  for  the  plant  as  a  whole,  but  for  each 
step  in  the  production  process  as  well. 

Although  it  is  self-evident  that  no  utility  business  can 
be  successfully  conducted  without  an  accurate  knowledge 
of  the  cost  of  rendering  the  service,  it  was  surprising  to 
find  that  as  a  rule  the  best  conducted  privately  owned  utili- 
ties had  only  in  a  measure  recognized  the  importance  of 
cost  accounting  systems,  while  municipally  owned  utilities 
had  made  no  advancement  along  this  line  whatever  when 
regulation  first  began.  In  this  connection  it  may  be  said, 
however,  that  the  accounting  systems  prescribed  by  the 
Commission,  although  differing  materially  from  those  for- 
merly in  vogue,  have  met  with  general  approval  among 


78        RAILROADS  AND  PUBLIC  UTILITIES 

managers  of  privately  owned  plants,  and  those  of  muni- 
cipally owned  plants  who  were  inclined  and  in  a  position 
to  administer  the  affairs  of  the  plant  on  a  sound  business 
basis. 

The  local  authorities  in  control  of  municipal  utilities 
very  naturally  did  not  adopt  the  systems  as  readily  as  the 
privately  owned  utilities.  This  lack  of  efficiency  has  been 
due  to  various  causes.  The  rotation  in  office,  lack  of 
administrative  ability,  and  accounting  knowledge,  were 
among  the  chief  causes.  The  Railroad  Commission  of  "Wis- 
consin recognized  the  difficulties  of  the  utilities  in  this  re- 
spect and  has  adopted  means  of  assisting  those  utilities 
that  find  difficulty  in  conforming  the  accounting  practices 
to  the  needs  of  the  Commission.  This  assistance  consists 
of  prescribing  the  systems  required  in  each  instance  and 
furnishing  accountants  for  actual  installation  work.  Un- 
der this  method  all  utilities  encountering  difficulties  are 
given  an  opportunity  to  secure  the  necessary  accounting 
assistance.  It  is  worthy  of  note  that  approximately  90 
per  cent  of  the  applications  for  assistance  and  the  actual 
installation  work  has  been  in  connection  with  municipally 
owned  plants.  This  is  an  encouraging  situation,  for  it 
manifests  a  desire  on  the  part  of  the  municipalities  to  place 
the  municipally  owned  plants  on  a  firm  business  basis. 

From  the  viewpoint  of  regulation,  the  inability  of  utili- 
ties to  properly  follow  the  advanced  ideas  along  account- 
ing lines  has  made  the  work  difficult  in  many  instances. 
In  addition,  it  has  caused  numerous  unjust  questions  re- 
garding rates.  It  is  of  interest  to  both  the  utilities  and 
the  public  that  all  utilities  adhere  strictly  to  the  sys- 
tems of  accounts  outlined  by  the  various  state  commis- 
sions. With  information  kept  in  the  proper  manner,  and 
as  a  matter  of  public  record,  there  is  no  doubt  that  a 
great  deal  of  misunderstanding  between  the  utilities  and 
the  public  will  be  eliminated. 


CHAPTER   VII 

DEPRECIATION 

State  regulation  has  brought  the  subject  of  deprecia- 
tion to  the  forefront  with  renewed  interest.  Both  the  pub- 
lic and  the  utility  owners  have  begun  to  give  thoughtful 
study  to  this  question  so  that  the  operating  expenses  of  a 
plant,  which  determine  in  a  large  degree  scales  of  rates 
to  the  public,  may  be  properly  defined.  When  plants 
were  small  and  owned  by  their  operators  the  importance 
of  depreciation  was  not  so  great.  Now  that  the  securities 
of  these  enterprises  are  sold  on  the  open  market  in  all  parts 
of  the  country,  the  investor  desires  full  information  of 
all  properties  behind  the  equities  and  the  plan  and  rate  of 
depreciation  by  which  these  properties  are  to  be  kept  intact. 

By  depreciation  is  meant  the  amount  that  must  be  set 
aside  by  an  operating  property  to  cover  wear  and  tear,  gen- 
eral decay,  obsolescence  and  inadequacy.  Depreciation 
begins  as  soon  as  a  part  of  the  plant  is  in  place  or  com- 
pleted, "and  continues  until  it  becomes  useless  or  is  dis- 
placed."1 It  may  not  represent  an  actual  expenditure, 
but  it  is  the  amount  that  is  set  aside  to  offset  the  loss  in 
value  occurring  to  an  operating  plant.  Theoretically,  the 
sum  reserved  makes  up  the  difference  "between  the  value 
of  the  plant  at  any  period  after  construction,  although  kept 
in  good  running  condition  by  ordinary  repairs,  and  the 
original  cost  value  of  the  plant." 

1  State  Journal  Printing  Co.  et  al.  v.  Madison  Gas  $•  Electric  Co., 
1910,  4  W.  E.  C.  R.,  559,  818. 

79 


80        RAILROADS  AND  PUBLIC  UTILITIES 

The  nature  of  each  of  the  elements  that  go  to  make 
up  depreciation  is  about  as  follows :  ordinary  repairs,  that 
are  constantly  being  made  in  every  plant,  are  designed  to 
offset  wear  and  tear.  While  in  the  nature  of  depreciation 
these  items,  which  continue  about  the  same  year  after 
year,  are  generally  charged  directly  to  the  operating  ex- 
penses, they  are  not  always  included  in  the  depreciation 
allowance.  General  decay  includes  such  changes  as  are 
caused  by  the  action  of  the  elements,  commonly  known  as 
"decrepitude."  These  changes  cannot  be  offset  by  ordi- 
nary repairs,  but  require  the  replacement  of  the  entire 
unit.  They  affect  all  elements  of  tangible  property  with  the 
exception  of  land.  Through  invention,  and  the  develop- 
ment of  the  art,  machines  and  methods  of  operation  that 
were  economical  yesterday  may  be  obsolete  to-day.1  One 
class  of  engine  supersedes  another,  requiring  changes  in 
equipment ;  water  power  may  be  developed  to  take  the 
place  of  steam  or  overhead  wires  may  be  ordered  under 
ground — all  these  changes  are  elements  of  obsolescence 
that  could  not  be  foreseen  by  ordinary  judgment,  and  must 
be  covered  by  depreciation.  Moreover,  the  city's  popula- 
tion may  have  increased  rapidly,  requiring  larger  pumps, 
engines,  equipment,  or  buildings  for  utility  operation.  The 
losses  thus  occasioned  through  inadequacy  are  proper  ele- 
ments to  be  taken  into  account  in  determining  depreciation. 
By  setting  aside  from  the  income  a  just  amount  for  de- 
preciation regularly,  the  original  cost  of  the  utility  is  main- 
tained.2 

' '  Depreciation  is  an  element  of  expense  just  as  much  as 
wages,  fuel,  supplies,  or  any  other  element  which  is  ordi- 
narily charged  to  operation  or  maintenance  of  the  plant. ' ' 3 


1In  re  Fond  du  Lac  Water  Co.,  1910,  5  W.  E.  C.  Ev  515,  815. 
2  Whitewater  v.  Whitewater  El.  Lt.  Co.,  1910,  6  W.  E.  C.  E.,  138. 
"In  re  Application  Jefferson  Municipal  El.  Lt.  and  Water  Plant, 
1910,  5  W.  E.  C.  E.,  560. 


DEPRECIATION  81 

Under  the  system  of  uniform  accounting,  required  of  all 
utilities  by  the  Commission,  it  is  treated  as  an  operating 
expense.  Differentiation  is  made,  however,  between  re- 
pairs and  depreciation.  In  a  general  way  the  uniform  ac- 
counting plan  provides  that  the  "losses  in  value  of  all 
tangible  property  which  lasts  one  or  more  years  shall  be 
charged  to  the  depreciation  account."  Other  property 
lasting  less  than  one  year  and  tools  are  covered  by  the 
maintenance  and  repair  accounts.  When  the  cost  of  the 
units  renewed  is  greater  than  the  original  cost,  the  excess 
is  charged  to  the  construction  accounts.  With  respect  to 
the  relation  of  depreciation  charges  to  renewals  the  Com- 
mission has  said: 

Depreciation  is  a  regular  charge,  but  the  expenditures '-  of  the 
depreciation  fund  are  irregular.  Thus  it  happens  that  there  may 
be  long  periods  in  the  life  of  a  plant  during  which  depreciation 
is  accumulating,  but  when  no  renewals  of  any  considerable  pro- 
portions are  made.  Because  of  these  and  other  similar  reasons, 
it  is  seldom  safe  to  assume  that,  during  any  given  period,  the 
depreciation  and  the  renewals  amount  to  about  the  same  thing. 

The  rate  of  depreciation  depends  upon  the  character 
of  the  utility.  A  telephone  plant  goes  to  the  scrap  heap 
about  five  times  as  quick  as  a  water  utility  and  the  an- 
nual percentage  of  depreciation  to  be  charged  off  is  corre- 
spondingly greater.  These  rates  are  illustrated  by  tables 
at  the  close  of  the  chapter.  From  what  has  been  said  it 
must  be  evident  that  "the  cost  of  general  decay,  obso- 
lescence and  inadequacy,  being  irregular,  .  .  .  should  be 
provided  for  in  advance  by  charging  each  year's  expense 
through  depreciation  with  its  pro  rata  proportion."2 

1  State  Journal  Printing  Co.  et  al.  v.  Madison  Gas  <f-  Electric  Co., 
op.  cit.,  559. 

2  Commissioner  Erickson,  Address  delivered  before  the  Convention 
of  Central  Water  Works  Association,  Detroit,  Mich.,  Sept.  25,  1912, 


82        RAILROADS  AND  PUBLIC  UTILITIES 

In  business  it  is  the  accepted  practice  that  depreciation 
must  be  provided  for.  A  plant  that  is  not  earning  enough 
to  meet  depreciation  is  a  losing  proposition,  whether  it  is 
operated  by  a  municipality  or  under  private  management.1 
The  only  difference  between  the  two  classes  of  management 
is  that  the  deficiencies  of  the  former  are  oftener  met 
through  public  taxation  and  in  the  latter  the  losses  fall 
upon  the  stockholders.  This  state  of  affairs  is  sought  to 
be  corrected  by  the  Wisconsin  Public  Utility  Law  which 
provides  that: 

1.  Every  public  utility  shall  carry  a  proper  and  adequate  de- 
preciation 2  account  whenever  the  commission  after  investigation 
shall  determine  that  such  depreciation  account  can  be  reasonably 
required.  The  commission  shall  ascertain  and  determine  what 
are  the  proper  and  adequate  rates  of  depreciation  of  the  several 
classes  of  property  of  each  public  utility.  The  rates  shall  be 
such  as  will  provide  the  amounts  required  over  and  above  the 
expense  of  maintenance,  to  keep  such  property  in  a  state  of  effi- 
ciency corresponding  to  the  progress  of  the  industry.  Each 
public  utility  shall  conform  its  depreciation  accounts  to  such  rates 
so  ascertained  and  determined /by  the  commission.  The  commis- 
sion may  make  changes  in  such  rates  of  depreciation  from  time 
to  time  as  it  may  find  to  be  necessary. 

2.  The  commission  shall  also  prescribe  rules,  regulations  and 
forms  of  accounts  regarding  such  depreciation  which  the  public 
utility  is  required  to  carry  into  effect. 

3.  The  commission  shall  provide  for  such  depreciation  in 
fixing  the  rates,  tolls  and  charges  to  be  paid  by  the  public. 

4.  All  moneys  thus  provided  for  shall  be  set  aside  out  of  the 
earnings  and  carried  in  a  depreciation  fund.  The  moneys  in  this 
fund  may  be  expended  in  new  construction,  extensions  or  addi- 

p.  9.  Much  of  the  information  used  in  this  chapter  is  based  on  the 
data  in  this  paper  and  recent  depreciation  tables  prepared  under  di- 
rection of  Mr.  Erickson. 

1  Dodgeville  v.  Dodgeville  El.  Lt.  <f  Power  Co.,  1908,  2  W.  E.  C.  R., 
406. 

2 Sec.  1797m-15  (Ch.  499,  Laws  of  1907),  Statutes  of  1913. 


DEPRECIATION  83 

tions  to  the  property  of  such  public  utility,  or  invested,  and  if 
invested  the  income  from  the  investments  shall  also  be  carried 
in  the  depreciation  fund.  This  fund  and  the  proceeds  thereof 
shall  be  used  for  no  other  purpose  than  as  provided  in  this  sec- 
tion and  for  depreciation. 

The  weight  to  be  given  to  depreciation  as  an  element  in 
determining  the  valuation  of  a  utility  has  already  been 
considered  in  a  previous  chapter.  Since  its  purpose  is  to 
keep  the  original  investment  intact,  it  must  also  be  con- 
sidered in  computing  the  cost  of  the  service  for  the  pur- 
pose of  determining  rates.  Were  depreciation  not  thus  al- 
lowed capital  could  not  be  induced  to  enter  the  field,  for 
the  investment  on  which  the  securities  rest  would  be  yearly 
deteriorating. 

Before  the  era  of  regulation  little  attention  was  paid 
to  depreciation.  Instead  of  setting  aside  a  reserve  to  take 
care  of  it,  this  amount  was  included  in  the  net  earnings  to 
be  divided  among  the  stockholders.  What  renewals  were 
necessary  were  generally  charged  to  new  construction  upon 
which  new  capital  issues  were  predicated.  This  method  of 
watering  and  rewatering  went  on  until  rates  became  ex- 
cessive or  until  it  was  no  longer  possible  to  secure  money 
on  new  stock  issues. x  The  evil  of  such  a  system,  pointed 
out  in  numerous  decisions  by  the  Commission,  has  been 
expressed  thus:  - 

When  depreciation  is  collected  from  the  customers  2  it  should 
be  devoted  to  the  upkeep  of  the  plants,  and  not  diverted  to  the 
stockholders.  This  the  consumers  have  a  right  to  demand.  To 
turn  over  the  depreciation  so  collected  to  the  stockholders  is 
equivalent  to  paying  dividends  out  of  the  capital;  for  such  de- 
preciation is  the  amount  that  is  required  in  order  to  keep  the 

— — — ~ . —  -  ■■ --w 

1  In  re  Application  La  Crosse  Gas  $  Elec.  Co.,  1907,  2  W.  E.  C.  E., 
12. 

1  In  re  Menominee  $  Marinette  Light  #■  Traction  Co.,  1^09,  3  W. 
E.  C.  E.,  778,  790. 


84        RAILROADS  AND  PUBLIC  UTILITIES 

investment  intact.  Such  use  of  the  amounts  collected  from  the 
consumers  for  depreciation  under  the  conditions  named  might 
even  furnish  justification  for  demanding  that  it  either  be  restored 
to  the  depreciation  fund,  or  deducted  from  the  valuations  upon 
which  rates  are  based. 

Methods  for  determining  the  life  of  a  property  are 
detailed  and  complex.  Some  parts  of  a  plant  are  worn 
out  in  five  years ;  other  parts  in  ten,  fifteen,  twenty  or  even 
one  hundred  years.  The  parts  must  be  classified  on  the 
basis  of  life  and  considered  in  age  groups.  This  life  is  not 
the  same  for  all  plants  even  of  the  same  class.  Materials 
from  which  the  plant  is  constructed,  the  care  of  the  equip- 
ment, method  of  operation  and  local  conditions,  such  as  the 
character  of  the  soil  through  which  the  pipes  of  a  water 
utility  pass,  the  kind  of  water  supplied,  and  electrolysis,  all 
have  an  effect  in  determining  depreciation. 

The  engineering  staff  of  the  Wisconsin  Commission,  in  deter- 
mining the  life  of  the  various  classes  of  property  and  the  amount 
of  depreciation  that  has  taken  place  therein,  not  only  carefully 
examine  the  property  and  make  full  notes  on  all  the  facts  by 
which  its  condition  appears  to  be  affected,  but  they  also  make  use 
of  life  tables  of  various  kinds  as  well  as  of  other  facts  and  infor- 
mation that  have  any  bearing  upon  the  matter  [said  Commissioner 
Erickson].1  Among  other  things  they  have  prepared  tables 
which  show  the  per  cent  conditions  on  the  sinking  fund  basis  for 
various  lengths  of  life  as  high  as  one  hundred  years.  This  per 
cent  condition,  when  used,  is  still  further  controlled  by  the  con- 
dition of  the  property  as  ascertained  by  actual  inspection.  When 
this  condition  is  good  the  property  is  rated  at  about  one  hun- 
dred per  cent  of  its  unexpired  life.  When  it  is  poor,  it  is  rated 
at  about  eighty  per  cent  of  its  life,  etc.  These  tables  are  rather 
complicated.  This  is  also  more  or  less  true  of  the  methods  by 
which  they  are  applied.     The  results  obtained  in  this  way  have 

1  Commissioner  Erickson,  Address  at  Detroit,  Mich.,  Sept.  25, 
1912,  op.  cit. 


DEPRECIATION  85 

often  been  tested  by  other  methods.  In  fact,  it  has  been  de- 
termined again  and  again  that  such  tables,  supplemented  by  close 
personal  inspection  of  the  property,  almost  invariably  lead  to 
more  reliable  results  than  would  be  obtained  from  inspection 
alone. 

Considering  all  of  the  different  classes  of  property,  ele- 
ments and  conditions,  the  engineers  compute  the  life  of 
each  of  the  parts  of  a  plant  as  well  as  the  ' '  composite  life ' ' 
of  the  plant  as  a  whole.  The  latter  is  the  aggregate  of  the 
lives  of  the  separate  units  of  equipment,  and  represents 
the  number  of  years  during  which  the  entire  plant  wTill 
have  depreciated  to  an  amount  equal  to  its  first  cost.  In 
determining  the  composite  life  two  methods  are  ordinarily 
used:  (1)  "dollar  year"  method,  '(2)  direct,  or  "straight 
line"  method. 

Under  the  first  method  property  is  all  classified  as  to 
cost  value  less  scrap,  and  as  to  age.  A  computation  is 
then  made  (See  Tables  I  and  III)  as  to  how  many  times 
each  part  will  have  to  be  renewed  before  the  part  of  longest 
life  is  renewed.  "There  is  then  determined1  the  total 
number  of  dollars  required  for  each  class  during  the  long- 
est life  period  and  this,  in  turn,  is  multiplied  by  the  num- 
ber of  years  during  which  each  dollar  'does  duty.'  The 
result  of  this  multiplication  is  a  figure  representing  •  dollar 
years,'  which  is  divided  by  the  total  dollars  used  for  the 
purpose  of  replacement  during  the  longest  life  period, 
which  gives  the  average  or  composite  life."  A  comparison 
of  the  results  obtained  under  either  method  shows  that 
they  are  the  same.  Each  process  shows  the  life  of  the 
water  company  used  as  an  example  in  the  tables  to  be 
61.64  years  and  of  the  electric  light  and  power  plant  to  be 
17.15  years. 

1  City  of  Ripon  v.  Eitwn  Lt.  <f  Water  Co.,  1910,  5  W.  R.  C.  R.,  1, 
20-21. 


86       RAILROADS  AND  PUBLIC  UTILITIES 

According  to  the  direct  method,  the  process  mostly  used 
by  the  Railroad  Commission  of  Wisconsin,  the  life  of  each 
unit  is  determined.  It  is  then  assumed  that  during  this 
life  the  depreciation  is  uniform.1  If  a  unit  expires  in  five 
years,  one-fifth  of  its  cost  (See  Tables  II  and  IV)  is  set 
aside  annually.  The  composite  life  of  the  plant  is  ascer- 
tained by  dividing  the  sum  for  all  the  classes  into  the  total 
cost  new  of  all  the  property  less  its  scrap  value.  The 
direct  method  of  determining  the  composite  life  of  the 
plant  has  a  very  close  application  to  the  "straight  line" 
method  of  financing  the  depreciation,  to  be  discussed  in 
later  paragraphs. 

Water  Works 

TABLE  I 
"Dollar  Year"  Method 


Class 

Life 

Cost  of 
repro- 
duction 
new 

Scrap 
value 

Cost 

new 

less 

scrap 

Times  re- 
newed in 
100-year 
period 

Dollars 

required 

in  100-year 

period 

Dollar 
years 

A 

B 

C 

D 

E 

F 

G 

H 

5 
15 
20 
25 

30 

40 

50 

100 

$245 
2,020 
5,950 
3,177 

23,193 

19,080 

59,964 

20S.070 

0 

0 

469 

922 

327 

40 

3,016 

22,121 

$245 
2,020 
5,481 
2,255 

22,866 

19,040 

56,948 

185,949 

20.00 
6.67 
5.00 
4.00 

3.33 
2.50 
2.00 
1.00 

$4,900 

13,473 

27,405 

9,020 

76,143 

47,600 

113,896 

185,949 

24,500 
202,095 
548,100 
225,500 

2,284,290 

1,904,000 

5,694,800 

18,594,900 

Total . . . 

$321,699 

$26,895 

$294,804 

$478,386 

29,478,185 

.  ...    29,478,185       _,    „A 

Average  hfe  -  =  61. 64  years. 


Several  plans  have  been  worked  out  by  engineers  for 
financing  the  depreciation  once  the  average  or  composite 
life  has  been  determined.  Of  these  only  two,  in  general 
use  in  the  United  States,  are  given  cognizance  by  the  Wis- 

1Hill  et  al.  v.  Antigo  Water  Co.,  1909,  3  W.  E.  C.  E.,  623,  643. 


DEPRECIATION 


87 


TABLE  II 
Direct  Method 


Class 

Life 

Cost  of 
repro- 
duction 
new 

Scrap 
value 

Cost  new 
less  scrap 

Annual 
per  cent 
of  depre- 
ciation 

Annual  am't 
required  to 
cover  depre- 
ciation 

A 

5 
15 
20 
25 

30 

40 

50 

100 

$245 
2,020 
5,950 
3,177 

23,193 

19,080 

59,964 

208,070 

0 

0 

469 

922 

327 

40 

3,016 

22,121 

$245 
2,020 
5,481 
2,255 

22,866 

19,040 

56,948 

185,949 

20.00 
6.67 
5.00 
4.00 

3.33 
2.50 
2.00 
1.00 

$49 

135 

274 

90 

761 

476 

1,139 

1,859 

B 

C 

D 

E 

F 

G 

H 

$321,699 

$26,895 

$294,804 

$4,783 

Average  life 


294,804 
4,783 


61 .  64  years. 


Electric  Lighting  and  Power  Plant 

TABLE  III 

"Dollar  Year"  Method 


Class 

Life 

Cost  of 
repro- 
duction 
new 

Scrap 
value 

Cost 

new 

less 

scrap 

Times  re- 
newed in 
75-year 
period 

Dollars 

required 

in  75-year 

period 

Dollar 

years 

A 

B 

C 

D 

E 

F 

G 

H 

I 

5 

8 

10 

12 

15 

16 
20 
25 
50 
60 
75 

$210 

7,124 

17,361 

26,272 

143,470 

65,632 
113,336 
43,747 
14,337 
1,165 
21,920 

$14 

153 

0 

11,920 

33,375 

9,239 

7,631 

0 

0 

0 

$210 

7,110 

17,208 

26,272 

131,550 

32,258 
104,097 
36,116 
14,337 
1,165 
21,920 

15.00 
9.38 
7.50 
6.25 
5.00 

4.69 
3.75 
3.00 
1.50 
1.25 
1.00 

$3,150 

66,692 

129,060 

164,200 

657,750 

151,290 
390,364 
108,348 

21,506 
1,456 

21,920 

15,750 

533,536 

1,290,600 

1,970,400 

9,866,250 

2,420,640 
7,807,280 
2,708,700 
1,075,300 
87,360 
1,644,000 

J 

K 

Total . . . 

I 

$454,574 
12%  over 

$62,331 

$392,243 
47,069 

$1,715,736 

29,419,816 

$439,312 

Average  life 


29,419,861 
1,715,736 


17.15  years. 


88       RAILROADS  AND  PUBLIC  UTILITIES 


TABLE  IV 
Direct  Method 


Class 

Life 

Cost  of 
repro- 
duction 
new 

Scrap 
value 

Cost  new 
less  scrap 

Annual 
per  cent 
of  depre- 
ciation 

Annual  am' t. 
required  to 
cover  depre- 
ciation 

A 

5 

8 
10 
12 
15 

16 

20 
25 
50 
60 
75 

$210 

7,124 

17,361 

26,272 

143,470 

65,632 
113,336 
43,747 
14,337 
1,165 
21,920 

$0 

14 

153 

0 

11,920 

33,374 

9,239 

7,631 

0 

0 

0 

$210 

7,110 

17,208 

26,272 

131,550 

32,258 
104,097 
36,116 
14,337 
1,165 
21,920 

20.00 

12.50 

10.00 

8.33 

6.67 

6.25 
5.00 
4.00 
2.00 
1.67 
1.33 

$42 

B 

889 

C 

1,721 

D 

2,188 

E 

8,774 

F 

2,016 

G 

5,205 

H 

1,445 

I 

287 

J 

19 

K 

292 

Total 

$454,574 
12%  over 

$62,331 

$392,243 
47,069 

$22,878 
2,745 

$439,312 

$25,623 

392,243 

Average  life =  17.15  years. 

22,878 

consin  Commission.    They  are:  (1)  Sinking  fund,  or  com- 
pound interest  curve  basis,  (2)  straight  line  basis. 

Explaining  the  purposes  and  differences  between  these 
two  methods  the  Commission  in  the  case  of  the  State  Jour- 
nal Printing  Company  v.  Madison  Gas  &  Electric  Com- 
pany1 said: 

The  compound  interest  curve  method  of  determining  the 
annual  amounts  required  to  make  up  the  depreciable  plant  values 
assumes  that  equal  annual  amounts  will  be  set  aside  for  the  sep- 
arate classes  of  equipment,  arranged  according  to  their  length 
of  life,  sufficient  with  the  aid  of  interest  accumulations  at  a  given 
per  cent,  to  make  up  the  depreciable  value  of  the  property  of  that 
class  at  the  end  of  its  life.  The  composite  life  on  this  basis  is 
the  number  of  years  necessary  to  accumulate  the  sum  total  of 
these  separate  reserves  at  the  given  per  cent  of  interest.  The 
estimated  reserve  under  this  method  is  the  minimum  allowance  re- 

1  State  Journal  Printing  Co.  et  al.,  604-605. 


DEPRECIATION  89 

quired  to  meet  depreciation.  It  assumes  that  replacements  will 
not  occur  before  the  end  of  the  assumed  life  and  that,  hence,  the 
reserve  will  have  every  opportunity  to  accumulate  the  expected 
interest.  .    .    . 

The  straight  line  method  of  determining  the  annual  amounts 
required  to  make  up  the  dejareciable  plant  values  assumes  that 
there  will  be  no  interest  accumulations.  The  total  to  be  set  aside 
each  year  in  this  case  is  the  sum  total  obtained  by  dividing  the 
value  of  each  of  the  separate  classes  by  its  life.  The  composite 
life  is  the  multiplier  required  to  make  these  annual  payments 
equal  to  the  entire  depreciable  plant  value.  Here,  it  should  be 
noted,  the  estimated  reserve  is  the  maximum  allowance  required 
to  offset  depreciation.  Replacements  may  be  made  with  any 
degree  of  frequency,  as  the  exchange  of  debits  and  credits  to  the 
reserve  account  is  supposed  to  be  so  continuous  as  to  entirely 
obviate  the  possibility  of  interest  accumulations. 

Perhaps  these  methods  become  more  intelligible  to  the 
average  reader  when  applied  to  a  concrete  plant  for  illus- 
tration. The  accompanying  tables  prepared  by  Commis- 
sioner Erickson  assume  an  electric  plant  whose  depreciable 
property  at  cost  new  amounts  to  $454,574  (Tables  III  or 
IV) .  The  scrap  value  totals  $62,331,  leaving  a  balance  of 
$392,243,  which  represents  total  depreciation  that  must  be 
met  out  of  the  operating  revenues  of  the  plant  before  its 
entire  life  has  expired. 

As  the  composite  life  of  this  electric  plant  has  already 
been  determined  to  be  17.15  years,  the  average  amount  to 
be  set  aside  annually  under  the  straight  line  basis  of  financ- 
ing the  depreciation  is  $22,878.  These  facts  set  forth  in 
Table  IV  show  that  the  rate  of  depreciation  varies  from  20 
per  cent  for  property  in  the  five-year  group  to  1.33  per 
cent  for  property  in  the  seventy-five-year  group.  For  all 
these  groups  of  tangible  property  the  average  rate  is  5.33 
per  cent  on  the  depreciable  amount.  This  method,  being 
the  more  simple  of  the  two,  is  advocated  by  the  Railroad 


90        RAILROADS  AND  PUBLIC  UTILITIES 

Commission  in  a  majority  of  eases  and  is  also  generally 
used  by  the  Interstate  Commerce  Commission. 

The  difference  between  the  straight  line  and  the  sink- 
ing fund  method  is  that  the  latter  assumes  that  the  amounts 
annually  set  aside  shall  bear  compound  interest.  These  in- 
terest payments  added  to  the  fund  obviously  require  a 
smaller  annual  allowance  out  of  the  operating  revenues. 
While  in  some  instances  only  a  2-per-cent  interest  is  allowed 
on  the  fund,  the  predominating  sentiment  favors  a  4-per- 
cent basis,  the  rate  of  interest  paid  by  banks.  The  latter 
rate  is  used  in  Table  V  as  an  illustration. 


TABLE  V 
Sinking  Fund  Method  (4  Per  Cent) 


Class 

Life 

Cost  of 
repro- 
duction 
new 

Scrap 
value 

Cost  new 
less  scrap 

Annual  per 
cent  re- 
served on 
4-per-cent 
basis 

Annual 
fund 

A 

5 

8 

10 

12 

15 

16 
20 
25 
50 
60 
75 

8210 

7,124 

17,361 

26,272 

143,470 

65,632 
113,336 
43,747 
14,337 
1,165 
21,920 

$0 

14 

153 

0 

11,920 

33,374 

9,239 

7,631 

0 

0 

0 

$210 

7,110 

17,208 

26,272 

131,550 

32,258 
104,097 
36,116 
14,337 
1,165 
21,920 

18.46 

10.85 

8.33 

6.65 

i.4.99 

4.58 

3.36 

2.40 

.65 

.42 

.22 

$39 

B 

771 

C 

1,433 

D 

1,747 

E 

6,564 

F 

1,478 

G 

3,498 

H 

867, 

I 

93 

J 

5 

K 

48 

Total 

$454,574 
12%  over 

$62,331 
head 

$392,243 
47,069 

$16,543 

1,985 

$439,312 

$18,528 

Average  life 


16,543 
392,243 


.04217  =  17.01  years. 


Applying  these  principles  to  the  same  electric  plant 
described  above,  the  amount  set  aside  and  charged  to  oper- 
ating expenses  is  $16,543,  or  about  4.20  per  cent  of  the 
property.    With  a  compound  interest  rate  of  4  per  cent  the 


DEPRECIATION 


91 


allowances  increase  from  $16,543  the  first  year  1  to  $23,545 
for  the  tenth  and  to  $30,985  for  the  seventeenth.  Under 
this  plan  the  amount  of  estimated  depreciation  is  lowest 
at  first  and  gradually  increases,  as  interest  payments  on 
the  growing  fund  increases.  In  favor  of  the  adoption  of 
the  sinking  fund  basis,  it  is  pointed  out  that  usually  a 
utility  becomes  better  established  year  after  year;  that  its 
earnings  increase  correspondingly  and  that  the  deprecia- 


TABLE  VI 

Comparison  of  Annual  Reserves  Set  Aside  to  Cover  Depreciation 
Under  Straight  Line  and  Sinking  Fund  Methods 


Year 

Straight  line 

2  per  cent 
sinking  fund 

4  per  cent 
sinking  fund 

1 

$22,878 
22,878 
22,878 
22,878 
22,878 

22,878 
22,878 
22,878 
22,878 
22,878 

22,878 
22,878 
22,878 
22,878 
22,878 

22,878 

22,878 

3,431 

$19,454 
19,843 
20,240 
20,645 
21,057 

21,479 
21,909 
22,347 
22,794 
23,249 

23,712 
24,189 
24,672 
25,166 
25,670 

26,183 
26,707 
3,112* 

$16,543 
17,205 
17,893 
18,609 
19,352 

20,126 
20,932 
21,769 
22,641 
23,545 

24,487 
25,468 
26,485 
27,546 
28,647 

29,792 
30,985 
165f 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

17.15 

Total 

$392,357 

$392,428 

$392,190 

*.16  year. 
f.01  year. 


1  For  more  detailed  depreciation  tables,  see  Erickson  's  address, 
Sept.  25,  1912,  op.  cit. 


92        RAILROADS  AND  PUBLIC  UTILITIES 

tion  is  greater  as  the  years  go  by  than  at  first  when  the 
plant  is  new.  As  an  economic  principle  it  would  follow 
that  such  a  basis  of  financing  the  depreciation  would  be 
sound.  Since  the  interest  payments  are  added  to  the  fund 
the  direct  charges  to  operating  expenses  are  lower,  which 
of  course  is  reflected  in  the  rates.  Wherever  convenient 
this  method  is  applied  by  the  Wisconsin  Commission, 
though  not  in  as  many  instances  as  the  straight  line  plan. 

Preceding  is  a  comparison  of  the  annual  reserves  set 
aside  to  cover  depreciation  under  the  straight  line  and  sink- 
ing fund  methods  as  applied  to  the  electric  plant  described 
above. 

Circumstances,  however,  determine  which  method  shall 
be  applied  by  the  Railroad  Commission.  The  law  does 
not  require  that  this  money  for  depreciation  shall  be  kept 
on  hand,  nor  that  it  must  be  invested  outside  of  the  utility. 
Instead,  the  statute  permits  the  use  of  the  funds  "in  new 
construction,  extensions  or  additions  to  the  property  of 
such  public  utility,  or  invested ;  and  if  invested  the  income 
from  the  investment  shall  also  be  carried  in  the  deprecia- 
tion fund."  The  money  in  the  depreciation  fund  cannot 
be  diverted  to  another  purpose,  but  only  temporarily  loaned 
to  meet  the  demands  of  actual  conditions.  It  must  be 
restored  to  the  fund  when  needed  to  cover  the  demands  of 
depreciation.  The  capital  for  the  new  extensions  must 
ultimately  be  obtained  by  some  financial  method  similar 
to  that  used  to  raise  money  for  new  extensions,  had  the 
depreciation  fund  not  been  in  existence. 

Tables  have  also  been  prepared  to  illustrate  the  life 
of  several  classes  of  utilities  in  Wisconsin  and  the  rate  of 
depreciation.  These  two  tables  have  been  made  up  from 
the  data  collected  on  twenty-three  Wisconsin  water  com- 
panies and  twenty-three  electric  plants.  They  show  pres- 
ent value,  composite  life  of  the  depreciable  property,  and 
the  annual  rate  of  depreciation.    Here  again  the  longevity 


DEPRECIATION 


93 


of  water  plants  (37  to  62  years)  compared  with  electric 
plants  (14.6  to  20.8  years)  is  clearly  illustrated.  This  dif- 
ference in  life  is  reflected  in  the  rates  for  depreciation 
which  vary  from  1.24  to  2.44  per  cent  in  water  plants 
compared  with  2.35  to  6.20  per  cent  in  electric  concerns. 


Wisconsin  Water  Utilities 

TABLE  VII 
Depreciation  Reserves 


Compos- 

Per cent 

Popula- 

Cost 

Compos- 

ite life 

of  fund 

tion  of 

of 

Per 

ite  life 

(4  per 

Annual 

total 

Utility 

city 

repro- 

cent 

Present 

(straight 

cent 

fund 

prop- 

(1910 

duction 

condi- 

value 

line) 

sinking 

(straight 

erty,  in- 

census) 

new 

tion 

years 

fund) 
years 

line) 

cluding 
land 

A 

40,384 

$690,001 

94.6 

$653,070 

67.29 

5S.00 

$8,548 

1.24 

B 

25,531 

531,020 

93.4 

496,346 

49.86 

44.34 

8,212 

1.55 

C 

11,594 

401,581 

94.0 

377,517 

63.11 

56.25 

5,642 

1.41 

D 

16,773 

268,687 

84.6 

287,445 

51.96 

47.68 

4,458 

1.66 

E 

14,610 

318,327 

91.5 

291,022 

61.62 

56.95 

4,784 

1.50 

F 

8,893 

185,148 

92.3 

170,824 

67.60 

59.60 

2,464 

1.33 

G 

8,692 

127,897 

88.4 

113,060 

48.11 

55.74 

2,325 

1.82 

H 

5,629 

109,432 

94.7 

100,502 

60.55 

53.30 

I 

3,793 

101,360 

93.1 

94,319 

44.76 

44.16 

1,145 

1.13 

J 

7,196 

84,276 

90.2 

77,201 

60.03 

55.57 

1,076 

1.28 

K 

5,036 

73,493 

90.1 

66,216 

56.99 

50.65 

1,163 

1.58 

L 

3,830 

61,139 

92.0 

56,285 

66.33 

58.38 

812 

1.33 

M 

2,675 

36,947 

92.2 

34,072 

55.51 

51.07 

577 

1.56 

N 

2,907 

36,899 

90.1 

33,225 

59.31 

51.75 

518 

1.40 

O 

2,582 

49,855 

92.9 

46,315 

54.66 

48.69 

748 

1.50 

P 

1,808 

23,138 

89.9 

20,804 

69.77 

62.04 

286 

1.24 

Q 

1,833 

11,784 

79.6 

9,937 

36.49 

37.00 

288 

2.44 

R 

804 

8,115 

90.6 

7,334 

46.40 

45.75 

162 

2.00 

S 

15  125 

242,327 

92.0 

224,483 

62.90 

58.12 

2,901 

1.20 

T 

13,027 

220,382 

92.9 

204,716 

66.19 

58.51 

2,472 

1.12 

U 

13,894 

217,611 

93.1 

202,579 

63.69 

56.21 

2,784 

1.28 

V 

18,797 

309,449 

90.2 

279,312 

53.49 

46.93 

8,088 

2.61 

w 

6,324 

120,816 

91.7 

110,426 

55.16 

49.33 

1,839 

1.52 

Arithmeti- 

cal average 

10,076 

$183,899 

91.0 

$169,435 

57.55 

52.43 

$2,786 

1.53 

The  subject  of  depreciation  raises  many  engineering 
and  economic  problems  that  are  only  suggested  in  this 
chapter  and  illustrated  by  the  accompanying  tables.     No 


94        RAILROADS  AND  PUBLIC  UTILITIES 

Wisconsin  Electric  Utilities 
TABLE  VIII 

Depreciation  Reserves 


Utility 

Popula- 
tion of 
city 
(1910 
census) 

Cost 

of 
repro- 
duction 
new 

Per 

cent 
condi- 
tion 

Present 
value 

Compos- 
ite life 
(straight 
line) 
years 

Annual 
fund 

(straight 
line) 

Per  cent 
of  fund 
to  total 

prop- 
erty, in- 
cluding 

land 

A 

40,384 
30,417 
18,797 
15,125 
8,893 

5,783 
4,717 
4,477 
3,224 
2,692 

2,652 
2,582 
2,450 
1,860 
1,833 

1,803 

919 

425 

25,531 

25,236 

11,594 
5,036 
3,739 

$342,624 

478,501 

154,023 

178,610 

75,773 

47,230 

51,480* 

56,492* 

37,583* 

27,418 

35,752 
41,511 
26,142 
25,660 
21,180 

19,524* 

11,865 

17,559 

443,158 

119,505 

80,079 
93,139 
35,804 

74.1 

79.4 
77.4 
83.7 
65.3 

80.9 
74.6 
77.2 
75.7 
63.4 

81.5 
80.5 
62.0 
70.8 
80.3 

76.8 
97.4 
85.0 
78.9 
79.9 

71.8 
70.4 
75.1 

$253,766 

379,825 

119,186 

149,581 

49,484 

38,193 

38,436* 
43,593* 
28,440* 
17,389 

29,152 
33,415 
16,223 
18,171 
17,015 

14,985* 
11,557 
14,917 
349,846 
95,490 

57,501 
65,567 
26,899 

17.91 
17.15 
15.55 
18.18 
15.60 

15.49 
19.45 
16.97 
17.31 
16.75 

16.02 
19.29 
14.69 
15.71 
22.38 

20.80 
15.09 
18.25 
17.02 
16.73 

16.03 
17.54 
18.24 

$16,310 

22,876 

8,883 

9,313 

4,650 

2,611 
2,119 
2,896 
1,945 
1,478 

1,928 
1,712 
1,509 
1,191 
779 

1,210 

687 

647 

24,694 

5,846 

1,884 
3,874 
1,861 

4.76 

B 

4.78 

C 

5.76 

D 

5.21 

E 

6.14 

F 

G 

5.53 
4.12 

H 

5.13 

I 

5.17 

J 

5.39 

K 

5.39 

L 

4.12 

M 

5.77 

N 

4.64 

O 

3.68 

P 

6.20 

Q 

5.79 

R 

3.68 

s 

5.57 

T 

4.89 

U 

2.35 

y* 

4.16 

W 

5.20 

Arithmetical 

9,573 

$105,244 

76.6 

$81,245 

17.31 

$5,257 

4.93 

*  Does  not  include  land. 


attempt  is  made  to  cover  the  entire  field — that  would  re- 
quire a  volume  in  itself.  But  enough  has  been  said  to 
outline  the  reasons  for  its  allowance,  the  systems  by  which 
it  is  computed,  and  the  method  followed  by  the  Railroad 
Commission  of  "Wisconsin  in  recognizing  it. 

Accountants  differ  as  to  the  manner  of  recording  de- 
preciation transactions  upon  the  books  of  a  company.  The 
"Wisconsin  Commission  provides,  in  its  system  of  uniform 


DEPRECIATION  95 

accounts,  that  a  "Depreciation  Account"  shall  be  opened 
as  a  part  of  the  operating  expense  "to  which  shall  be 
charged  monthly,  crediting  the  depreciation  reserve,  an 
amount  equal  to  one-twelfth  of  the  estimated  annual  de- 
preciation of  the  tangible  capital  in  the  service  of  the 
utility."  When  property  has  to  be  renewed  the  cost  new 
of  the  same,  less  scrap  value,  is  charged  to  the  depreciation 
reserve  and  credited  to  the  cash  account.  The  necessary 
adjustments  are  also  made  in  the  entries  to  the  property 
accounts. 


CHAPTER   VIII 

PUTTING    UTILITIES    ON    A    BUSINESS    BASIS 

The  usual  concept  of  regulation  is  that  it  is  a  means  of 
protecting  the  interests  of  the  public  in  the  matter  of  lower 
rates  and  better  service.  But  regulation  would  be  far  from 
effective  if  this  were  its  only  purpose.  Utilities  would  only 
have  to  obey  the  mandates  of  the  Commission  and  do  noth- 
ing more. 

A  situation  such  as  this  would  lead  to  a  condition  of 
staticism  in  all  public  utility  lines.  For  this  reason,  regu- 
lation must  be  twofold.  It  must  have  in  mind  not  only  the 
interest  of  the  public  but  also  the  interest  of  the  public 
service  corporation.  In  formulating  rate  orders  and  im- 
posing service  requirements,  the  Commission  must  have 
in  mind  at  all  times  that  its  final  action  must  be  based 
upon  two  considerations,  namely,  how  the  interest  of  the 
public  may  be  conserved  and  how  the  progress  of  the  in- 
dustry may  best  be  promoted. 

Demagogues  on  the  subject  of  regulation  lose  sight  of 
this  latter  consideration  entirely  and  in  their  desire  to 
obtain  lower  rates  or  better  service  from  existing  equip- 
ment they  often  neglect  to  consider  the  effect  that  such 
action  may  have  upon  the  policy  of  the  management  of 
public  utilities  and  also  upon  the  ease  with  which  capital 
may  be  induced  to  flow  into  the  field.  Not  only  must 
capital  be  brought  into  the  public  utility  field  but  the  in- 
terest of  the  investor  must  be  directed  to  his  investment 
to  such  an  extent  that  new  and  modern  methods  are  in- 

96 


UTILITIES  ON  A  BUSINESS  BASIS  97 

troduced  whenever  they  are  placed  upon  the  market.  Ex- 
perimentation must  be  encouraged  and  every  effort  must 
be  directed  toward  the  promotion  of  increased  efficiency. 
The  Railroad  Commission  has  often  been  criticized  for 
its  recognition  of  efficiency  in  management  when  rate  ad- 
justments are  made.  But  its  critics  do  not  view  in  its 
proper  light  the  scope  of  regulation.  If  the  Commission 
were  to  reduce  the  rates  of  an  efficient  plant  as  soon  as 
any  savings  were  effected,  the  incentive  to  be  efficient  would 
be  entirely  eliminated  and  as  a  result  no  progress  would 
be  made  in  extending  the  public  utility  business.  In  order 
to  judge  fairly  the  efficiency  of  plants,  data  must  be  at 
hand  which  will  clearly  show  the  comparative  perform- 
ance of  the  various  factors  in  the  production,  transmission 
or  delivery  of  light,  heat,  water,  or  gas,  as  the  case  may 
be.  The  methods  by  which  the  efficiency  of  public  utilities 
are  tested  will  presently  be  discussed. 

UNIFORM    ACCOUNTING 

All  efficiency  is  relative.  This  necessitates  a  common 
basis  for  comparison.  The  Railroad  Commission  recog- 
nized this  fact  early  in  its  history.  A  uniform  system  of 
accounts  was  adopted  which  permitted  a  comparison  of 
utilities  operating  under  similar  conditions  and  circum- 
stances. Utilities,  under  this  system,  are  classified  accord- 
ing to  the  population  of  the  locality  in  which  they  operate 
and  according  to  the  revenue  derived  from  that  locality. 

Having  thus  established  a  basis  of  comparison,  it  is  an 
easy  task  for  the  Commission  to  compare  the  relative  effi- 
ciency of  the  various  plants  operating  under  similar  cir- 
cumstances. Every  year  the  Commission  publishes  a  unit 
cost  analysis  which  shows  the  cost  per  unit  of  the  dif- 
ferent factors  of  production. 

That  such  data  make  for  progress  in  the  public  utility 


98       RAILROADS  AND  PUBLIC  UTILITIES 

field  is  evidenced  by  the  fact  that  public  utility  operators 
are  constantly  reviewing  both  the  Commission's  annual 
report  and  the  reports  of  individual  utilities. 

Every  effort  is  made  to  effect  economies.  Electric  util- 
ity operators  compare  their  fuel  costs,  steam  costs,  power 
costs,  distribution  costs,  etc.  During  a  period  of  three 
years,  fuel  efficiency  alone  in  steam  plants  has  tremen- 
dously increased,  so  much  so  that  large  plants  have,  in  some 
instances,  been  able  to  successfully  compete  with  water 
power.  Below  is  given  a  comparative  table  showing  the 
cost  per  unit  for  1910  and  1913  of  several  items  included 
in  the  cost  of  power. 


Cost  per  kilowatt  hour  (in  cents) 


1913 


Fuel  expense 

Steam  expense 

Total  power  expense 


.58 
.71 
.51 


It  will  be  noted  that  the  elements  of  power  cost  per  unit 
have  been  reduced  in  some  instances  as  much  as  25  per 
cent  despite  the  fact  that  fuel  and  labor  costs  are  steadily 
advancing.  This  fact  alone  shows  that  the  Commission's 
regulation  of  utilities  has  not  been  a  detriment  to  the  pro- 
motion of  efficiency,  but  rather  an  aid. 

Efficiency  engineers  have  learned  early  in  their  work 
that  cost  analyses  must  be  made  on  some  comparable  bases 
before  efficiency  in  operation  can  be  accomplished.  The 
Railroad  Commission  adopted  this  principle  when  it  took 
up  rate  investigations  from  the  cost  point  of  view.  With 
the  information  which  it  had  at  hand  it  investigated  the 
comparative  cost  of  pumping  by  steam  and  electric  power, 


UTILITIES  ON  A  BUSINESS  BASIS  99 

of  generating  by  steam  or  hydraulic  power,  of  purchasing 
current  or  generating  by  local  plant  equipment.  This  infor- 
mation is  furnished  to  utilities  upon  request. 

Municipal  water  plants  have  been  advised  as  to  the 
saving  to  be  effected  by  the  operation  of  their  plants  by 
other  than  present  means  of  pumping.  Electric  companies 
have  been  able  to  determine  whether  it  would  be  to  their 
advantage  to  buy  or  generate  current. 

As  a  consequence  of  the  Commission's  activity  in  dem- 
onstrating the  desirability  of  large-scale  production  many 
local  plants  have  either  been  dismantled  or  made  to  serve 
as  substations  and  auxiliary  stations.  Not  only  does  this 
account  for  a  lower  cost  of  production  in  these  plants,  but 
in  addition  it  permits  small  communities  through  which 
transmission  lines  pass  to  receive  service  at  reasonable 
rates,  whereas  under  the  old  system  of  each  locality  with 
its  private  plant  such  small  communities  could  not  be 
served  at  all  or  at  most  at  a  prohibitive  price. 

The  Commission  even  before  the  stock  and  bond  law 
was  passed  had  directed  the  attention  of  utility  manage- 
ment from  the  promotion  side  to  the  operating  side  of  the 
business.  In  several  of  the  larger  cities  the  inefficient  fea- 
tures of  operation  have  been  pointed  out.  In  some  cases 
this  has  been  done  in  the  written  decisions  while  in  others 
it  has  been  taken  up  informally  with  the  companies  them- 
selves. 

The  larger  utilities  were  the  first  to  look  to  the  fund 
of  information  which  the  Commission  had  available  in  its 
search  of  the  cost  of  taking  on  additional  business.  In  the 
electric  business,  many  utilities  in  localities  where  water 
power  was  near  by  were  at  a  loss  whether  to  continue 
steam  plant  operation  or  to  buy  water  power.  With  the 
Commission's  uniform  classification  of  accounts  and  the 
inventories  of  property  values  at  hand  the  matter  was 
greatly  simplified. 


100     RAILROADS  AND  PUBLIC  UTILITIES 

Purchase  of  properties  has  been  greatly  facilitated  as 
each  of  the  parties  interested  in  the  transfer  has  access 
to  the  other's  report  and  the  system  of  accounting  being 
the  same  it  has  been  an  easy  matter  to  arrive  at  a  mutual 
understanding.  Investment  companies,  stockholders,  and 
bondholders  have  been  able  to  ascertain  the  conditions  sur- 
rounding their  investments. 


INCKEASE    IN    SURPLUS    ACCOUNTS 

One  of  the  best  evidences  of  conservative  and  business- 
like management  is  the  increase  of  the  surplus  account. 
Utilities  formerly  disposed  of  most  of  their  surplus  earn- 
ings in  dividends  instead  of  retaining  such  excess  in  their 
business.  As  a  consequence,  during  periods  of  low  earn- 
ings such  utilities  either  did  not  pay  their  customary  divi- 
dends or,  if  they  did  pay  them,  decreased  their  surplus 
materially,  thus  impairing  their  credit.  Regulation  has 
remedied  this  former  unbusinesslike  practice. 

In  Wisconsin  the  increase  of  the  surplus  of  utilities 
has  not  only  been  actual  but  relative.  The  following  tabu- 
lation will  show  the  extent  of  the  increase  in  the  surplus 
account. 

It  will  be  noted  that  the  total  surplus  for  all  utilities 
operating  in  the  state  has  borne  about  the  same  relation 
to  gross  earnings  since  1910.  The  remarkable  fact  in  con- 
nection with  the  table  is,  however,  the  relation  of  the  total 
surplus  account  to  the  plant  value.  In  this  respect  it  will 
be  seen  that  the  surplus  account  has  been  steadily  in- 
creasing. No  conclusion  can  be  drawn  other  than  that 
the  utilities  are  setting  aside  a  rather  fixed  percentage 
of  their  gross  earnings  as  surplus  and  that  the  total  surplus 
account  is  growing  rapidly,  due  largely  to  the  fact  that 
gross  earnings  are   increasing  more    rapidly   than   plant 


UTILITIES  ON  A  BUSINESS  BASIS        101 


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102     RAILROADS  AND  PUBLIC  UTILITIES 

values.    This  point  can  be  more  clearly  illustrated  by  the 
following  table : 

TABLE  II 

Percentage  Increases  in  Construction  Expenditures  and 

Operating  Revenues  for  Year  1913,  Using  Years 

1910,  1911  and  1912  as  Bases 


Plant  cost 
increases  year  1913 

Operating  revenue 
increases  year  1913 

Classification 

Over 
1910 

Over 
1911 

Over 
1912 

Over 
1910 

Over 
1911 

Over 
1912 

Electric  utilities 

Gas  utilities 

Telephone  utilities. . 
Heating  utilities. . .  . 
Electric  railway  util- 
ities   

17.98 
6.20 
14.17 
18.12 
55.23 

26.09 

1.13* 

4.27 

9.57 

13.71 

25.51 

13.92 

8.75* 
8.99 
6.38 
5.16 
19.58 

6.45 

62.04 
18.61 
25.38 
31.56 
65.47 

16.75 

27.92 
13.73 
13.40 
20.18 
64.41 

8.86 

17.58 
8.99 
1.20 
9.53 

22.86 

6.45 

*  Decrease. 

It  will  be  noted  from  a  study  of  the  table  that  al- 
though the  plant  value  of  utilities  in  Wisconsin  has  stead- 
ily increased,  it  has  not  kept  pace  with  the  increase  in  the 
total  revenues  of  the  utilities.  It  should  be  mentioned  that 
the  percentage  decreases  in  plant  value  of  electric  utilities 
during  the  years  1911  and  1912  are  due  to  the  fact  that 
during  1913  the  dam  of  one  of  the  largest  water-power 
companies  went  out,  thus  destroying  some  four  million  dol- 
lars of  property  value.  Aside  from  this  instance,  however, 
there  has  been  a  remarkable  increase  in  plant  values,  thus 
showing  that  the  investors  are  not  withholding  capital  as 
now  protected  by  the  stock  and  bond  statutes. 

The  question  immediately  arises  as  to  how  this  increase 
in  revenues  is  disposed  of.  In  Table  I  it  was  shown  that 
only  about  the  same  percentage  of  total  revenue  was  placed 


UTILITIES  ON  A  BUSINESS  BASIS        103 


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104      RAILROADS  AND  PUBLIC  UTILITIES 

to  the  credit  of  the  surplus  account  each  year.  The  nat- 
ural conclusion  would  be  that  utilities  were  increasing  their 
dividends  to  stockholders.  For  this  reason,  the  preceding 
table  is  instructive. 

This  table  shows  that  not  only  are  the  dividends  de- 
creasing in  comparison  with  gross  earnings,  when  one 
might  expect  the  opposite  to  be  true,  but  the  actual  decla- 
ration of  dividends  has  been  confined  to  about  the  same 
amount  each  year.  It  will  be  noted  that  the  average  divi- 
dend on  capital  stock  for  all  "Wisconsin  utilities  is  in  the 
neighborhood  of  four  and  one-half  per  cent  per  annum. 
Even  taking  into  consideration  the  probable  overcapitali- 
zation of  some  of  the  utilities  there  is  still  an  ample  margin 
before  an  unreasonable  dividend  rate  is  reached.  The  tele- 
phone utilities  probably  fairly  illustrate  the  rate  of  return 
that  all  utilities  in  general  would  receive  upon  a  fair  value 
of  their  property.  This  is  the  case  because  the  Commis- 
sion has  found  that  the  value  of  telephone  property  as  re- 
flected upon  the  books  of  the  companies  is  in  most  instances 
very  near  to  the  fair  value  of  the  plant  and  business  upon 
which  the  company  is  allowed  to  earn  a  return.  In  addi- 
tion to  this  fact,  telephone  utilities  usually  do  not  issue 
bonds,  so  that  their  dividends  for  all  practical  purposes 
represent  the  total  disbursements  made  from  their  net  in- 
come. In  accordance  with  the  above  discussion  on  the  divi- 
dends paid  by  public  utilities  in  the  state,  it  is  evident  that 
disbursements  made  for  this  purpose  are  not  in  proportion 
to  the  increase  in  earnings  but  quite  the  opposite. 

The  Commission  has  given  attention  to  the  matter  of  de- 
preciation. Probably  on  no  other  point  has  the  Railroad 
Commission  of  Wisconsin  more  consistently  dwelt  than  on 
the  subject  of  the  depreciation  of  utility  equipment.  Utility 
managers  have  been  cautioned  to  provide  adequately  for 
the  wear  and  tear,  obsolescence  and  inadequacies  of  their 
plants.    As  a  result,  more  and  more  of  the  operating  earn- 


UTILITIES  ON  A  BUSINESS  BASIS        105 

ings  have  been  set  aside  for  this  purpose.  The  following 
table  shows  the  amount  of  depreciation  set  aside  in  the  ease 
of  each  of  the  various  utilities.  The  table  also  shows  the 
relative  increase  of  this  allowance. 

TABLE  IV 

Showing  the  Actual  and  Relative   Increases  in  the  Annual 
Allowances  for  Depreciation  by  Wisconsin  Utilities 


1913 

1912 

1911 

1910 

Electric  utilities. .  . 

Telephone  utilities 
Heating  utilities. . . 

$595,694.57 
284,910.66 
184,006.46 

1,083,863.38 
15,459.65 

$568,183.33 

247,757.89 

136,663.89 

940,183.00 

12,350.08 

$421,520.14 

254,159.21 

69,917.58 

971,850.08 

9,790.98 

$373,725.92 

253,632.58 

31,839.31 

920,362.60 

9,383.83 

Total 

Per  cent  of  Plant 
Value 

2,163,934.72 

1.93 
10.02 

1,905,138.19 

1.73 
10.30 

1,727,237.99 

1.63 
10.15 

1,588,944.24 
1.65 

Per  cent  of  Total 
Revenue 

10.55 

It  is  obvious  from  a  study  of  this  table  that  the  allow- 
ance for  depreciation  has  kept  pace  with  the  increased  op- 
erating revenues  and  that  relative  to  plant  value  on  which 
depreciation  is  based  it  has  steadily  increased. 

By  constant  attention  to  the  matter  utility  operators  in 
Wisconsin  are  now  providing  for  renewals  from  their  de- 
preciation reserve  instead  of  adding  such  replacements  to 
the  property  and  plant  account  (already  heavily  watered 
in  some  cases)  or  to  the  operating  expenses  for  the  year. 

The  foregoing  analysis  of  the  financial  situation  leads 
to  the  conclusion  that  operating  revenues  and  plant  values 
of  utilities  in  AVisconsin  have  been  steadily  increasing.  The 
depreciation  and  surplus  accounts  of  the  utilities  have  in- 
creased at  about  the  same  rate  as  the  earnings  while  the 


106     RAILROADS  AND  PUBLIC  UTILITIES 


dividends  declared  as  compared  with  earnings  have  slightly 
but  steadily  declined.  Production  costs  in  the  case  of  elec- 
tric utilities  have  to  a  considerable  extent  been  reduced. 
There  remains  to  be  explained  what  has  become  of  the  dif- 
ference between  the  steadily  increasing  operating  reve- 
nues and  the  items  which  we  have  already  shown  to  have 
either  remained  relatively  stationary  or  to  have  decreased 
in  comparison  with  total  revenues.  The  following  table 
completes  the  story : 

TABLE  V 

Relation  op  Operating  Expenses,  Including  Depreciation  and 
Taxes,  to  Total  Revenues— Wisconsin  Utilities 


Classification 

1913 

1912 

1911 

1910 

Electric  railways. . 
Electric  utilities. .  . 

Gas  utilities 

Water  utilities .... 
Telephone  utilities. 
Heating  utilities. . . 

Per  cent 
70.64 
66.07 
69.28 
52.60 
77.12 
86.97 

Per  cent 
68.38 
69.59 
68.98 
48.94 
77.58 
85.82 

Per  cent 
67.96 
66.26 
66.57 
50.06 
76.15 
83.45 

Per  cent 
68.94 
65.65 
67.01 
48.27 
77.26 
79.86 

Total 

68.90 

68.55 

67.15 

67.55 

It  will  be  noted  that  in  the  case  of  the  electric  railway, 
gas,  water  and  heating  utilities,  the  operating  ratio  has 
steadily  increased;  in  the  telephone  industry  it  has  re- 
mained about  stationary ;  and  in  the  electric  utility  the  rela- 
tion varies  upward  and  downward.  When  the  total  for  the 
entire  state  is  given  consideration,  there  is  seen  to  be  a 
rather  steady  increase  in  the  ratio  of  operating  expenses 
to  total  revenues.  This  relative  increase  in  the  operating 
expense  explains  where  the  increased  earnings  have  been 
put. 

There  are  several  reasons  why  this  operating  ratio  has 
increased.    No  doubt  the  first  one  called  to  mind  is  that  of 


UTILITIES  ON  A  BUSINESS  BASIS        107 

the  increased  cost  of  labor  and  material.  In  the  ordinary 
manufacturing  business  such  increases  of  cost  are  gener- 
ally met  by  higher  prices  to  the  consumer,  so  that  the 
ratio  of  operating  expenses  to  total  revenues  always  re- 
mains about  the  same. 

It  will  be  noted,  however,  in  a  review  of  the  cases  which 
the  Commission  has  decided,  that  it  has  ordered  reduction 
of  rates  in  most  cases  in  the  very  utilities  which  are  af- 
fected by  this  increased  operating  ratio.  All  of  the  sub- 
stantial rate  decreases  have  been  in  the  case  of  electric 
railway,  electric,  gas,  and  water  utilities.  Increases  have 
been  allowed  to  some  extent  in  the  case  of  the  rates  of 
telephone  companies,  while  no  heating  case  involving  rate 
adjustments  has  as  yet  been  decided  by  the  Commission. 
The  decrease  in  the  margin  between  operating  revenues 
and  operating  expenses  can  then  be  traced  to  the  very  door 
of  regulation. 

The  explanation  of  how  such  lowering  of  the  rates  is 
possible  in  the  face  of  increased  expense  leads  one  back 
to  the  point  where  this  discussion  began.  By  efficient  meth- 
ods of  production  and  by  constant  increases  in  sales,  the 
output  of  these  public  utilities  has  increased  tremendously. 
In  some  measure  this  increased  consumption  of  utility  prod- 
ucts has  been  due  to  the  constant  effort  directed  toward 
increased  consumption  by  existing  consumers  and  to  some 
extent  to  the  rapid  rate  at  which  new  customers  have  been 
added. 

As  has  been  previously  shown,  the  cost  per  unit  has 
steadily  decreased.  In  the  electric  utility,  this  is  due 
to  the  consolidation  of  plants,  thus  effecting  a  saving 
in  cost  which  can  hardly  be  realized  by  one  who  has  not 
watched  the  growth  of  these  utilities.  In  the  gas  busi- 
ness, decreased  cost  has  come  about  by  increasing  the  sales 
in  proportion  to  the  investment.  The  same  is  true  in  the 
water  business.    In  the  electric  railway  business,  the  traffic 


108     RAILROADS  AND  PUBLIC  UTILITIES 

density  has  increased  in  all  of  our  cities  and  travel  has 
been  heavier.  In  all  of  these  cases  the  number  of  units 
of  product  sold  has  increased  faster  than  the  increased 
expenses  due  to  the  upward  tendency  in  the  cost  of  wages 
and  materials. 

It  is  probably  now  apparent  what  the  duties  of  the 
Commission  are  in  respect  to  this  situation.  In  the  electric 
utility,  the  state  regulatory  body  must  not  only  encour- 
age consolidation,  but  it  must  also  help  utilities  in  increas- 
ing sales  to  existing  customers,  for  in  its  doing  so  rests  the 
only  hope  of  reduced  prices  to  the  consumer.  The  same  is 
true  of  electric  transportation.  Extensions  of  lines  cannot 
be  ordered  at  will  for  the  increased  cost  occasioned  by  these 
added  investments  might  dissipate  all  of  the  surplus  earn- 
ings brought  about  by  the  increase  in  the  number  of  pas- 
sengers carried.  The  same  is  true  in  the  other  lines  men- 
tioned. Due  to  the  peculiarities  of  the  customary  telephone 
rate  schedules,  the  telephone  companies  are  required  to 
keep  their  operating  ratio  about  constant  or  only  slightly 
increasing  in  order  to  earn  a  fair  return  on  the  investment. 

Nothing  is  more  certain  than  that  a  vigilant  commis- 
sion must  keep  these  various  factors  in  mind  when  regulat- 
ing public  utilities.  Efficiency  must  be  promoted  in  order 
that  rates  shall  continue  to  be  lowered  instead  of  increased. 


CHAPTER   IX 

MAKING    OF   EAILEOAD    EATES 

The  revenues  of  a  railroad  company  are  derived  prin- 
cipally from  two  sources — passenger  and  freight  traffic. 
Between  26  and  30  per  cent  of  the  earnings  of  Wisconsin 
railroads  are  derived  from  passenger  service ;  approxi- 
mately 70  per  cent  comes  from  the  freight  service. 

The  gross  earnings  from  passenger-train  traffic  consist 
of  amounts  received  for  transporting  passengers  and  their 
baggage,  carrying  mail,  milk  and  express,  and  other  mis- 
cellaneous transportation  services.  The  gross  earnings 
from  the  freight-train  traffic  are  composed  primarily  of 
the  receipts  for  transporting  freight  and  for  the  switch- 
ing of  carload  freight  traffic.  In  addition,  railroads  de- 
rive earnings  from  certain  terminal  operations,  not  in- 
volving a  transportation  service,  however.  The  most  im- 
portant of  these  sources  are :  storage  of  freight  and  bag- 
gage ;  station  and  train  privileges ;  operating  elevators  and 
stockyards;  telegraph  and  telephone  services;  conducting 
hotels  and  restaurants.1 

At  first  the  Wisconsin  Commission  had  direct  charge 
over  passenger  fares  and  one  of  its  early  orders  2  was  a 
reduction  of  the  three-cent  passenger  rate.  The  legisla- 
ture of  1907,  however,  passed  a  mandatory  law  3  fixing  a 

xIn  re  Passenger  Bates  M.  St.  P.  $•  S.  S.  M.  By.  Co.,  1907,  1 
W.  E.  C.  E.,  544. 

2  Buell,  etc.,  op.  cit.,  324. 

3  See.  1798a  (Ch.  654,  Laws  of  1907)  Wis.  Stat.,  1913, 

109 


110     RAILROADS  AND  PUBLIC  UTILITIES 

flat  two-cent  passenger  rate  per  mile  on  all  railroads  having 
gross  earnings  in  excess  of  $3,500  a  mile  per  annum.  Most 
of  the  roads  of  the  state  earning  less  than  this  minimum 
immediately  announced  two-cent  fares  for  competitive  rea- 
sons, with  the  result  that  over  98  per  cent  of  the  passenger 
traffic  of  the  state  is  now  handled  on  the  two-cent  basis. 
This  law  does  not  affect  the  other  elements  of  passenger- 
train  traffic,  which  are  still  under  Commission  control. 

Power  to  decide  the  "reasonableness"  of  freight  rates 
is  given  to  the  Railroad  Commission.  The  law  prohibits 
rebates  and  discriminations  in  rates  to  shippers  and  re- 
quires the  approval  of  the  Commission  of  all  changes  in 
existing  tariffs,  before  they  become  effective.  Before  the 
period  of  regulation,  rebating  and  secret  freight  rates 
aided  in  the  building-up  of  many  a  monopoly  and  crushed 
the  life  of  many  a  competitor  in  business.  To-day  when 
every  shipper  in  Wisconsin  stands  on  an  equal  footing  it 
is  difficult  to  realize  the  demoralized  freight-rate  conditions 
existing  prior  to  1905. 

"Much  of  what  the  railroads  lost  in  the  reduction  of 
open  rates  that  everybody  shares,  they  recovered  by  being 
compelled  to  abolish  free  passes  and  secret  cut  rates  that 
went  only  to  insiders  and  grafters, ' ' x  wrote  Senator  La 
Follette  in  1912  in  commenting  on  the  accomplishments  of 
the  railroad  law  after  seven  years  of  trial.  "The  special 
examiners  whom  I  appointed  in  1903  uncovered  $5,992,- 
731.58  as  Wisconsin's  share  of  rebates  paid  by  twelve  roads 
during  the  six  years,  1898  to  1903.  By  stopping  rebates 
alone  the  railroads  have  gained  at  least  $1,000,000  a  year 
toward  offsetting  $2,000,000  they  lost  by  reduction  of 
rates." 

That  shippers  and  travelers  may  now  be  advised^ of  the 
lawful  rates  and  charges  a  railroad  may  collect  for  trans- 
portation service,  the  statute  requires  that  two  copies  of  all 

xLa  Follette 's  Autobiography,  354. 


MAKING  OF  RAILROAD  RATES  111 

tariffs  must  be  published  and  kept  on  file  at  every  shipping 
station  and  with  the  Railroad  Commission.  ' '  The  railroad 
company  could  not  depart  from  the  published  rates  with- 
out incurring  a  penalty;  nor  could  the  petitioner  receive 
the  benefit  of  a  lower  rate  with  impunity. ' ' 1  Nor  will 
mistakes  in  quoting  the  correct  rate  relieve  the  shipper 
from  paying  the  lawful  charge,  or  the  railroad  from  ex- 
acting it.2  Overcharges  by  the  railroad  may  be  recovered 
by  the  shipper  through  the  filing  of  "reparation"  pro- 
ceedings with  the  Commission.  Thus  by  law  is  the  rebate 
subterfuge  to  favorites  eliminated.  The  small  shipper  is 
given  the  same  reasonable  rate  as  the  large  one.3 

The  usual  classes  of  freight  rates  in  force  in  other 
states  are  permissible  under  the  Wisconsin  law  with  the 
possible  difference  that  "all  such  rates  shall  be  open  to  all 
shippers  for  a  like  kind  of  traffic  under  similar  circum- 
stances and  conditions  and  shall  be  subject  to  the  provi- 
sions .  .  .  as  to  printing  and  filing  of  the  same."  The 
Commission  is  empowered  to  change  any  rate  or  classifica- 
tion; it  may  order  joint  rates  and  is  specifically  directed 
to  permit  concentration,  commodity  and  other  special  con- 
tract rates. 

Before  considering  how  the  Commission  determines  the 
"reasonableness"  of  a  freight  schedule  or  makes  a  new 
rate,  a  definition  of  each  separate  class  of  rates  and  a  state- 
ment of  the  reason  for  their  existence,  as  viewed  in  the  light 
of  the  Commission's  decision,  should  be  given,  because  they 
are  necessary  to  an  understanding  of  the  freight-rate  prob- 
lem.   The  more  important  kinds  of  rates  are : 

1.  Class  rates.  The  charges  on  the  majority  of  rail- 
road shipments  are  determined  by  two  factors — first,  the 

1  Fountain-Campbell  Lumber  Co.  v.  C.  St.  P.  M.  $■  0.  B.  Co.,  1908, 
3  W.  E.  C.  E.,  64,  999. 

2  Barney  v.  G.  B.  $  W.  B.  Co.  et  al.,  1910,  4  W.  E.  C.  E.,  777,  905. 

3  In  re  Bates  on  Milk  and  Cream,  1908,  2  W.  E.  C.  E.,  475. 


112     RAILROADS  AND  PUBLIC  UTILITLES 

class  within  which  the  article  is  placed,  and  second,  by  the 
rates  applicable  to  that  class.  There  are  two  separate  docu- 
ments: the  classification  book  and  the  tariff.  "Class  rates 
are  usually  the  highest  rates  in  effect.  They  are  so  high 
in  fact  that  the  heavier  and  cheaper  commodities  can  sel- 
dom be  moved  thereunder  and  this  is  very  largely  the  rea- 
son why  commodity  rates  have  been  put  into  effect. ' ' x 

2.  Commodity  rates.  "Low-grade  commodities,  gen- 
erally speaking,  must  be  transported  at  the  lowest  reason- 
able rates,  if  they  are  to  be  moved  at  all.  For  such  com- 
modities the  class  rates  may  easily  be  so  high  as  to  make 
the  cost  of  transportation  exceed  the  cost  of  production. 
These  are  factors  that  should  always  receive  due  consid- 
eration in  rate-making,  for  it  is  usually  to  the  best  in- 
terests of  all  concerned  that  products  of  nearly  all  kinds 
should  be  moved  from  places  where  they  are  not  needed  to 
places  where  there  is  a  demand  for  them. ' ' 2 

3.  Concentration  rates.  "A  concentration  rate  is  only 
another  name  for  a  transit  rate  or  transit  privilege.  It  is 
a  rate  that  is  sometimes  granted  on  certain  commodities 
when  they  are  reshipped  out  from  the  centralizing  point 
to  the  markets  over  the  same  line  as  that  over  which  they 
are  shipped  into  the  centralizing  point,  and  when  the  rates 
out  from  the  centralizing  point  are  high  enough  to  cover 
any  deficit  that  may  arise  because  of  the  lower  rate  into 
the  centralizing  point."  3  "A  concentration  rate  is  not  in- 
dependent in  itself.  It  is  merely  a  rate  that  is  granted 
to  some  points  where  the  commodities  may  be  stopped 
while  in  transit  for  sorting,  cleaning,  remanufacture,  and 
then  be  reshipped  to  their  destination  over  the  same  line 
of  road."4 

xFergot  v.  C.  $  N.  W.  E.  Co.,  1909,  4  W.  E.  C.  E.,  254. 
2Schwoegler  $  Kelly  v.  C.  M.  #  St.  P.  E.  Co.,  1910,  5  W.  E.  C.  E., 
289. 

8  Cochrane  Co.  v.  C.  M.  4'  St.  P.  E.  Co.,  1908,  3  W.  E.  C.  E.,  3-4. 
*  Webb  Produce  Co.  v.  C.  $  N.  W.  E.  Co.,  1908,  3  W.  E.  C.  E.,  35. 


MAKING  OF  RAILROAD  RATES  113 

4.  Local  rates.  ' '  One  of  the  attributes  of  a  local  rate 
is  that  it  is  independent  of  itself;  that  it  normally  consti- 
tutes a  reasonable  compensation  for  the  services  covered 
by  it;  and  that  it  has  no  connection  with  any  other  local 
rate  or  service. ' ' x 

5.  Joint  or  through  rates.  "The  fixing  of  joint  rates 
between  two  or  more  lines  for  through  hauls  from  points 
on  one  line  to  points  on  some  other  line  is  always  a  mooted 
question.  Generally  speaking,  it  may  be  said,  however, 
that  the  basis  for  joint  rates  should  be  the  same  as  that 
for  local  rates.  That  is,  they  should  as  far  as  possible 
be  based  on  the  cost  of  the  service  properly  modified,  when 
necessary,  by  competitive  and  commercial  conditions. 
Joint  rates  are  ordinarily  fixed  at  a  lower  figure  than  the 
sum  of  the  local  rates  on  each  line  and  at  a  higher  figure 
than  the  local  rate  on  one  line  for  a  like  distance."  2 

6.  Group  rates.  "Group  rates  are  sometimes  estab- 
lished between  one  shipping  point  and  several  consuming 
points,  and  at  other  times,  again,  between  one  consuming 
point  and  several  shipping  points."  3  "Several  sections  in 
the  same  territory  are  placed  in  the  same  group  and  .  .  . 
some  fixed  commodity  or  group  is  given  the  same  rate  to 
any  given  market  or  markets.  This  method  of  adjusting 
the  rates,  while  not  scientific,  is  sometimes  justifiable,  es- 
pecially when  dealing  with  established  conditions. ' ' 4 

Two  basic  principles  in  the  making  of  "reasonable" 
rates  may  be  typified  by  phrases  denoting  the  doctrines 
involved:  (1)  "value  of  the  service"  and  "what  the 
traffic  can  bear, "  ( 2 )  "  cost  of  the  service. ' ' 

1  Cochrane  Co.,  op.  cit.,  30. 

-  Bingle  et  al.  v.  C.  M.  #  St.  P.  B.  Co.  et  ak,  1911,  7  W.  R.  C.  E., 
182-183. 

3  Wisconsin  Pulp  $  Paper  Mfrs.  v.  C.  $  N.  W.  B.  Co.,  et  al.,  1910, 
6  W.  R.  C.  R.,  452-453. 

4Konrad  Schreier  Co.  v.  C.  M.  $■  St.  P.  B.  Co.  et  al.,  1910,  5  W. 
R.  C.  R.,  672,  849. 


114     RAILROADS  AND  PUBLIC  UTILITIES 

The  value  of  the  service  basis  "points  out  the  bounds 
of  extortion."  It  is  based  upon  the  ability  to  pay.  This 
principle  is  generally  advanced  by  those  who  desire  free- 
dom in  rate-making  and  who  abhor  interference  and  re- 
strictions.1 It  results  in  separate  rates  or  group  rates, 
disregards  distance  tariff  methods  and  the  relationship  of 
commodities,  and  is  noted  for  the  wide  latitude  of  judg- 
ment that  may  be  exercised  by  the  rate-maker.  Few 
writers  agree  on  the  exact  definition  of  the  phrase,  "value 
of  the  service."  Some  contend  that  value  of  the  service 
depends  upon  time  and  speed  of  shipment,  the  equipment 
of  the  road  and  other  conditions.  Others  again  hold  that 
"in  an  exact  sense  it  expresses  the  value  created  by  the 
transportation  service."2  By  the  phrase  "charging  what 
the  traffic  will  bear"  is  meant  fixing  rates  on  what  the 
shipper  can  afford  to  pay.  It  is  heralded  as  a  "business 
developer."  It  is  so  flexible  a  method  that  it  has  been 
characterized  a  "mere  haphazard  estimate."  Judge  Noyes 
frankly  says: 

In  so  far  as  it  empowers  railroad  officials  to  fix  rates  3  accord- 
ing to  their  own  judgment  without  other  rule  or  practice  than  a 
desire  to  obtain  for  their  companies  all  of  the  revenues  possible, 
present  and  prospective,  it  does  confer  a  tremendous  power.  It 
is  a  power,  however,  subject  to  the  economic  check  that  charging 
what  the  traffic  will  not  bear  cuts  off  business  and  affects  the 
prosperity  of  the  railroad. 

The  practice  of  basing  rates  on  the  "value  of  the  ser- 
vice" and  "what  the  traffic  will  bear"  factors  was  begun 
with  the  earliest  railroads  and  has  been  generally  followed 
since.  Enough  has  perhaps  been  said  in  explanation  to 
place  these  principles  in  contrast  with  the  so-called  "cost  of 

1  Commissioner  Erickson,  Address  before  the  National  Association 
of  Railway  Commissioners,  Washington,  D.   C,   1910,  24. 

2  Walter  C.  Noyes,  American  Eailroad  Rates,  29  n. 

3  Ibid.,  55. 


MAKING  OF  RAILROAD  RATES  115 

the  service ' ' *  basis  adopted  in  Wisconsin.  The  latter 
system  is  now  being  accepted  by  the  Interstate  Commerce 
Commission,2  and,  in  a  modified  form,  by  several  states. 
Railroad  managers  generally  believe  that  this  system  is 
fallacious.  But  the  belief  that  the  "value  of  the  service" 
and  "what  the  traffic  will  bear"  theory  is  wrong  is  held 
by  many  economists,  including  Commissioner  Erickson, 
who  summarizes  his  disapproval  thus: 

Efforts  to  extract  from  these  phrases  anything  that  will  enable 
the  rate-maker  to  tell  just  where  he  stands  at  any  point  in  his 
work  are  proving  fruitless.  They  appear  to  be  clung  to  chiefly 
as  the  means  to  get  away  from  the  "cost  of  the  service"  basis 
which  is  less  amenable  to  manipulation  for  special  purposes.  They 
are  admirably  adapted  as  a  cover  for  certain  past  practices,  for 
under  them  almost  all  sorts  of  rates  and  special  preferences  in 
rates  can  be  justified.  As  they  cannot  be  formulated  into  a 
standard,  they  usually  lead  to  the  comparative  method  in  actual 
practice.3 


Objection  is  made  to  the  "cost  of  the  service"  basis 
that  the  method  is  too  involved;  that  the  fixed  expenses 
cannot  be  prorated  with  accuracy  over  the  units,  and  that 
the  results  at  best  would  be  but  an  estimate.  Against  these 
protests  the  Commission  in  several  decisions  discusses  the 
efficacy  of  the  cost  system  compared  with  any  other  known 
or  tried  method.     Its  reasons  are  thus  set  forth: 


1 ' '  Commissioner  Erickson  is  probably  the  leading  exponent  in  the 
United  States  of  the  theory  that  rates  should  be  based  on  the  cost 
of  the  service,  including  interest  on  the  value  of  the  plant.  He  has 
prepared  detailed  tables  showing  how  the  cost  of  the  service  of  each 
unit  is  secured. ' ' — Max  Thelan,  Report  on  Leading  Railroad  and 
Public  Service  Commissions,  Calif.,  1911,  48. 

2  M.  B.  Hammond,  Railway  Rate  Theories  of  the  Interstate  Com- 
merce Commission,  68. 

3  Erickson,  Address  before  the  National  Association  of  Railway 
Commissioners,  1910,  24. 


116     RAILROADS  AND  PUBLIC  UTILITIES 

We  have  made  careful  analyses  of  the  cost  of  terminal  a  ser- 
vice and  of  the  cost  of  operation  in  different  branches  of  the 
railway  service  of  the  respondent  companies.  While  such  statis- 
tics of  average  costs  as  well  as  their  distribution  among  different 
classes  of  freight  and  commodities  are  not  a  matter  of  exact 
mathematical  adjustment,  nor  do  we  believe  that  they  well  can 
be  made  such,  we  are  nevertheless  convinced  that  such  statistics 
are  the  only  guide  that  can  be  provided  with  reference  to  the  ab- 
solute reasonableness  of  a  particular  rate  and  the  profitableness 
or  unprofitableness  of  the  same.  To  deny  this  is  to  admit  that 
no  measure  of  any  kind  whatsoever  can  be  adopted  for  the  deter- 
mination of  the  remunerativeness  or  lack  of  remunerativeness 
of  a  particular  rate,  and  to  assign  rate-making  and  every  intelli- 
gent judgment  regarding  a  rate  to  the  wide  and  wild  domain  of 
conjecture.  This  may  be  generally  true  to-day;  we  fear  it  is 
more  widely  true  than  rate-makers  would  like  to  admit.  On  the 
one  hand  the  income  account  of  the  railway  companies;  on  the 
other  hand,  considerations  of  distance,  value,  space,  rate,  compe- 
tition, clamor,  importunity,  petition,  demonstration,  threat,  re- 
prisal, revenge,  good  will,  favoritism,  chance,  tradition,  specu- 
lation, metaphysical  generalities  and  vague  notions  of  all  kinds 
and  degrees  of  consciousness,  .  .  .  these  appear  to  be  the  only 
admitted  guides  and  rules  for  the  rate-maker.  This  Commission 
has  been  unable  to  find  secure  anchorage  in  any  one  or  more  or 
all  of  these.  We  find  it  absolutely  necessary  to  fall  back  upon 
detailed  analyses  of  earnings  and  expenses  and  interpret  these 
in  the  light  of  as  many  of  the  above  factors  in  rate-niaking  as  we 
can  reduce  to  a  tangible  basis.  In  saying  this  we  do  by  no  means 
wish  to  be  understood  as  maintaining  that  the  cost  of  the  service 
principle  is  the  only  principle  of  rate-making.  Every  student 
of  transportation,  as  well  as  every  practical  railway  man,  knows 
that  it  is  not.  However,  average  costs  and  average  rates  must 
run  in  lines  more  or  less  parallel  purely  as  sound  business  policy. 

The  development  of  cost  accounting  in  manufacturing 
plants,  and  its  application  by  the  Railroad  Commission  to 

1  So.  Wis.  Cheesetnen  's  Protective  Ass '».  v.  C.  M.  $  St.  P.  B.  Co. 
et  ah,  1906,  1  W.  E.  C.  E.,  153-154. 


MAKING  OF  RAILROAD  RATES  117 

the  public  utilities  of  Wisconsin  after  five  years  of  trial, 
would  seem  to  disprove  the  contention  that  it  is  impossible 
to  determine  unit  costs. 

Recent  improved  methods  of  accounting  render  it  pos- 
sible to  ascertain  the  cost  of  the  product  of  each  depart- 
ment in  an  industrial  plant,  and  the  separate  cost  of  each 
process  of  finishing  and  manufacture.  It  accounts  for  the 
cost  of  material,  labor,  selling  and  other  general  expenses. 
Such  systems  measure  the  efficiency  of  the  workmen,  keep 
an  exact  record  of  all  goods  finished  and  their  cost,  show 
what  departments  or  processes  are  profitable  or  unprof- 
itable, "in  short,  there  is  hardly  an  activity  in  or  about 
a  business  enterprise  that  cannot  be  shown  up  or  accounted 
for  by  the  most  advanced  cost  system  now  in  use."  x 

No  large  enterprise  that  assumes  contracts  in  advance 
of  the  production  or  manufacture  of  the  article  could 
safely  operate  without  such  a  cost  system.  It  is  an  inte- 
gral part  of  the  industrial  system  of  to-day.  Adjustments 
in  the  accounts  are  so  made  as  to  show  the  exact  cost  of 
the  material  and  labor  at  every  stage  of  production.  This 
exact  cost  is  necessary  to  determine  the  price  at  which 
the  article  can  be  sold  at  a  profit. 

A  railroad  is  likewise  a  productive  enterprise.  It  has  a 
plant  to  operate  and  maintain,  a  general  office  for  super- 
vision, an  operating  department  to  produce  transportation 
and  a  traffic  department  that  sells  two  kinds  of  service 
— passenger  and  freight.  It  usually  requires  separate 
trains  and  separate  crews  to  furnish  each  class  of  service. 
As  might  be  anticipated  from  a  close  examination  of  the 
accounts,   a  majority  of  the  expenses  of  each  branch  of 

1  An  illuminating  comparison  of  cost  accounting  in  manufactur- 
ing enterprises  and  how  it  can  be  applied  to  the  railroad  business, 
with  a  full  discussion  of  the  detailed  separation  of  railroad  ac- 
counts to  determine  the  proper  cost  units,  may  be  found  in  the  Buell 
case,  op.  cit.,  393-407.  Much  of  the  above  discussion  is  drawn  from 
this  source. 


118     RAILROADS  AND  PUBLIC  UTILITIES 

the  service  are  direct  and  can  be  easily  separated.  Ex- 
penses common  to  both  services,  such  as  supervision,  main- 
tenance of  way  and  structures,  general  expenses  and  other 
general  items,  cannot,  however,  be  so  readily  segregated, 
"but  must  be  divided  upon  some  arbitrary  basis."  But  in 
the  traffic  department,  for  example,  an  examination  of  the 
items  of  expense — salaries  of  passenger  agents,  freight 
agents ;  printing  passenger  tickets ;  freight  tariffs ;  station- 
ery and  other  office  and  general  expenses — suggests  a  pos- 
sible separation. 

Thus  the  greater  part  of  the  direct  expenses  can  be 
charged  to  each  service  separately  through  an  arrange- 
ment of  the  expense  items,  though  it  is  seldom  done,  as 
a  perusal  of  railroad  reports  will  disclose.  Direct  costs  for 
transporting  freight  or  passengers  include  "the  train 
service  and  supplies,  the  locomotive  service  and  supplies, 
station  service  and  supplies  and  the  maintenance  of  equip- 
ment and  many  other  items." 

Under  most  cost  systems  now  in  use  the  common  or  in- 
direct expenses  are  apportioned  in  the  main  between  the 
two  services  in  proportion  to  the  direct  expenses.  Items 
that  depend  more  particularly  on  a  special  part  of  the  ser- 
vice may  be  allotted  to  the  unit  of  this  service. 

The  feasibility  of  such  a  system  of  allocating  railroad 
expenses  to  determine  unit  costs,  by  methods '  similar  to 
those  used  in  manufacturing  plants,  is  well  illustrated  by 
the  segregation  of  expense  items  and  costs  made  by  the 
Commission  in  the  Buell  two-cent  fare  case.  There  every 
item  incident  to  each  branch  of  transportation  was  tabu- 
lated in  detail  and  apportioned  with  results  that  surprised 
even  railroad  managers.  So  satisfactory  were  the  conclu- 
sions obtained,  from  this  reclassification  of  accounts,  that 
the  Commission,  after  commenting  upon  the  lack  of  ad- 
vance among  railroads  with  respect  to  the  distribution  of 
expenses  between  the  productive   departments   compared 


MAKING  OF  RAILROAD  RATES  119 

with  similar  cost  statistics  for  other  manufacturing  enter- 
prises, said  that  it1  "can  be  justly  drawn  that  the  princi- 
ples and  methods  of  cost  accounting  which  have  been 
adopted  in  other  industrial  and  commercial  undertakings 
can,  in  the  main,  also  be  applied  to  railroad  service.  Some 
changes  as  to  details  may  be  necessary  in  the  application 
of  these  principles,  owing  to  differences  in  the  respective 
enterprises,  but  no  radical  alterations  would  seem  to  be 
required."  Cost  units  are  of  primary  importance  in  any 
business  industry,  when  viewed  from  an  economic  stand- 
point. Even  the  reduction  of  entangled  railroad  accounts 
to  such  a  basis  would  seem  to  be  practical. 

In  making  freight  rates  the  cardinal  principle  is  that 
the  charges  shall  be  "reasonable."  What  is  "reasonable" 
is  difficult  to  determine.  The  courts  do  not  define  it.  When 
presented  with  a  specific  case  they  will  determine  the  issue 
in  that  one  instance.  The  Wisconsin  Commission  has  held 
that  justice  demands  that  the  carrier  is  entitled  to  earn 
its  operating  expenses  and  a  fair  income  on  the  value  of 
its  property ; 2  that  it  should  not  be  asked  to  establish 
rates  that  will  produce  less,  nor  allow  carriers  to  maintain 
rates  that  will  produce  more ;  that  it  does  not  follow  be- 
cause one  rate  is  low  and  another  is  high  that  both  are 
unreasonable,  but  that  ' '  rates  in  the  aggregate  are  too  high 
when  they  afford  the  carrier  more  than  a  reasonable  rate 
of  compensation  on  the  amount  of  its  investment  over  and 
above  the  cost  of  doing  the  business  and  of  keeping  the 
road  and  equipment  in  a  good  state  of  repair." 

The  Wisconsin  Commission  recognizes  two  controlling 
factors  in  the  making  of  a  "  reasonable ' '  rate,  cost  and  clas- 
sification. Unless  other  influences  enter,  these  predomi- 
nate. In  some  cases  either  element,  or  both,  may  be  modi- 
fied by  other  existing  conditions.     Specifically  stated  the 

1Buell,  etc.,  401. 

2  Buell  v.  C.  M.  $  St.  P.  E.  Co.,  op.  cit.,  339-340. 


120      RAILROADS  AND  PUBLIC  UTILITIES 

controlling  factors  are:  (1)  cost  of  the  service  per  unit 
of  transportation,  (2)  proper  classification  of  the  com- 
modity carried. 

Cost  of  the  service  is  the  first  element  to  be  considered. 
It  is  important  because  it  makes  possible  the  assessing  of 
charges  against  shipments  which  are  commensurate  with 
the  expenses  that  have  been  incurred  in  handling  it  for 
carload  as  well  as  less  than  carload  and  for  large  as  well 
as  small  shipments.1  The  initial  step  to  determine  the 
unit  costs  of  transportation  is  a  separation  of  the  expenses 
between  freight  and  passenger  service.  Under  the  method 
employed  by  the  Commission  this  involves  the  allocation  of 
expenses  according  to  the  one  hundred  and  sixteen  sep- 
arate accounts  and  a  recombination  that  will  show  the  ap- 
proximate cost  of  the  freight  and  passenger  business.  The 
freight  and  passenger  expenses  are  again  reclassified  and 
allocated  for  each  branch  between:  (1)  terminal  expense, 
and  (2)  the  cost  of  movement  between  terminals.2 

These  classification  processes  require  the  most  laborious 
and  painstaking  analysis,  but  statisticians  have  found  that 
when  the  items  have  been  put  through  the  laboratory 
process  "often  60  per  cent  of  the  expenses  are  found  to  be 
special  in  each  case  to  the  freight  and  the  passenger  traffic, 
and  that  the  balance  consisting  of  the  fixed  and  common 
items  bear  so  close  a  relation  to  certain  factors  in  the  busi- 
ness that  they  can  be  safely  apportioned  thereon."  3 

A  separation  of  terminal  and  movement  expenses  is 
necessary,  because  the  former  is  independent  of  the  length 
of  the  haul  and  the  latter  varies  with  the  length  of  the 


1  In  re  Bates  on  Pulp  Wood,  op.  cit.,  226. 

'In  re  Marathon  County  B.  Co.,  1911,  7  W.  E.  C.  E.,  397;  Bingle 
et  al.  v.  C.  M.  $  St.  P.  B.  Co.,  1911,  7  W.  E.  C.  E.,  182,  788;  Chip- 
pewa Sugar  Co.  et  al.  v.  C.  M.  &  St.  P.  B.  Co.,  1906,  1  W.  E.  C.  E., 
271. 

3  Erickson,  Address  before  the  National  Association  of  Eailway 
Commissioners,   1910,  28. 


MAKING  OF  RAILROAD  RATES  121 

haul.  Terminal  expenses  are  made  up  primarily  of  station 
and  switching  costs.  The  expense  of  switching  an  empty 
car  in,  or  a  loaded  car  out,  is  about  the  same,  independent 
of  what  the  car  contains,  so  that  the  cost  as  between  dif- 
ferent commodities  per  ton  or  hundredweight  varies  in- 
versely as  the  number  of  tons  in  the  car.  So  the  Commis- 
sion has  determined  that  "the  proper  unit  for  the  ter- 
minal expenses  is  the  ton  through  the  loaded  car. ' ' x  The 
cost  per  ton  or  hundredweight  varies  inversely  with  the 
loading  of  the  car. 

Movement  expenses  between  terminals  vary  with  the 
weight  and  distance.  It  costs  a^out  as  much  to  move  a 
ton  of  "dead  weight"  equipment 2  as  a  ton  of  revenue-pro- 
ducing freight.  The  greater  the  number  of  tons  of  "pay 
freight"  carried  the  less  the  cost  per  net  ton.3  The  cost 
unit  of  the  movement  expense  is  the  gross  ton  mile,  the 
gross  tonnage  including  weight  of  car  as  well  as  pay 
freight. 

The  separation  between  terminal  and  movement  ex- 
penses is  of  primary  importance.  Everyone  familiar  with 
freight  rates  knows  that  while  rates  increase  with  the  dis- 
tance the  increase  of  the  rates  is  much  lower  than  the  in- 
crease in  the  miles  of  haul.  It  would  be  a  very  unusual 
case  where  the  rate  for  fifty  miles  is  twice  as  great  as  the 
rate  for  twenty-five  miles,  or  the  rate  for  three  hundred 
miles  six  times  as  great  as  for  fifty  miles.  The  explana- 
tion is  that  the  terminal  expenses,  which  constitute  a  very 
considerable  proportion  of  the  total  expenses,  remain  the 
same  no  matter  what  the  length  of  haul,  so  although  the 
movement  expenses  do  vary  more  nearly  in  accordance  with 
the  distance,  the  terminal  costs  reflected  in  the  rates  pre- 

1  Single  et  al.,  etc.,  op.  cit.,  183. 

2  The  ordinary  freight  car  weighs  about  16  tons. 

3  Wis.  Pulp  <!'■  Paper  Mfrs.  v.  C.  $  N.  W.  B.  Co.  et  al,  1910,  6 
W.  R.  C.  R,  456. 


122     RAILROADS  AND  PUBLIC  UTILITIES 

vent  the  increase  of  the  rate,  representing  the  sum  of  the 
terminal  and  the  movement  costs,  from  increasing  as  fast 
as  the  distance. 

Elements  other  than  the  average  loading  of  commodi- 
ties which  affect  the  cost  units  for  freight  transportation 
are:  (a)  density  of  the  traffic,  (b)  weight  of  article  in 
proportion  to  bulk,  (c)  distance  carried,  (d)  risk  or  lia- 
bility to  damage. 

Movement  expenses  vary  with  the  amount  of  car  load- 
ing. The  loading  in  turn  is  dependent  largely  upon  the 
density  of  the  traffic.  It  requires  the  same  train  crew 
and  nearly  the  same  equipment  to  carry  a  small  quantity 
of  freight  as  a  larger  quantity.  The  heavier  the  loading 
per  car  and  train  the  lower  the  direct  expenses  in  pro- 
portion to  the  units  transported.  Elaborating  this  idea 
and  its  effects  upon  the  cost  of  transporting  an  article, 
the  Commission  has  said : 

"The  heavier  the  traffic,  other  things  being  equal,  the  lower  1 
the  cost  per  unit.  Less  than  carload  traffic,  however,  is  relatively 
much  more  costly  than  carload  traffic.  On  roads  where  the  pro- 
portion of  the  less  than  carload  business  is  greater,  the  cost  per 
unit  is  also  likely  to  be  relatively  higher  than  is  the  case  on 
roads  where  the  less  than  carload  business  is  relatively  small. 
This  might  be  true  even  when  the  total  tonnage  in  the  former 
case  is  somewhat  greater.  The  less  than  carload  shipments  ap- 
pear to  have  an  even  greater  effect  on  the  terminal  than  on  the 
movement  expenses.  That  this  should  be  the  case  is  also  natural, 
since  the  former  includes  station  and  terminal  expenses.  But 
while  there  are  some  variations  in  the  cost  per  unit  due  to  con- 
ditions of  this  nature,  these  variations,  as  said,  are  not  large." 
.  .  .  "Heavier  loading  stands  2  for  lower  cost  because  it  reduces 
the  proportion  of  dead  weight  to  pay  freight.  .  .  .  Relatively 
lower  amount  of  empty  car  mileage  means  lower  cost  because  it 

1  In  re  Bates  on  Cord  Wood,  1908,  2  WT  R,  C.  R.,  715. 

2  In  re  Bates  on  Pulp  Wood,  1908,  2  W.  R.  C.  R.,  221. 


MAKING  OF  RAILROAD  RATES  123 

means  more  effective  use  of  the  equipment  of  property  of  the 
earner."  "A  high  traffic  density  usually  stands  for  a  low  cost 
per  unit  of  transportation  and  a  low  traffic  density  for  a  high  cost 
per  unit  of  transportation."  1 

Similarly,  commodities  that  are  relatively  light  in  pro- 
portion to  their  bulk  require  higher  rates  than  those  which 
are  relatively  heavy.  The  number  of  tons  that  can  be 
loaded  into  a  car  of  bulky  light  articles  or  material  is 
less,  and  the  ratio  of  "dead  weight"  equipment  that  must 
be  carried  in  proportion  to  the  load  is  greater.  A  typical 
illustration  from  a  decision  will  suffice: 

An  ordinary  freight  car  will  weigh  about  fifteen  tons.  When 
a  car  of  this  kind  is  loaded  with  eleven  tons  of  freight,  there  are 
thus  about  1.36  tons  of  dead  weight  to  haul  for  each  ton  of  pay 
freight.  When  on  the  other  hand  the  car  has  twenty  tons  of 
freight  in  it,  there  are  only  .75  tons  of  dead  weight  to  one  ton 
of  pay  freight.  That  these  facts  are  important  is  readily  seen 
when  we  remember  that  the  freight  rates  must  be  largely  based 
on  both  the  weight  and  the  space  required,  and  when  we  find  that, 
in  so  far  as  the  actual  haulage  is  concerned,  it  costs  as  much  to 
transport  a  ton  of  dead  weight  as  a  ton  of  pay  freight.  .  .  . 
Since  this  is  the  case,  it  is  also  obvious  that  rates  must  be  higher 
for  those  commodities  which  are  relatively  light,  than  for  those 
which  are  relatively  heavy. 

Car  loadings  vary  from  five  to  forty  tons,  depending 
upon  the  bulkiness  of  the  article.  How  costs  per  ton  mile 
vary  with  the  different  car  loadings  is  illustrated  by  an 
actual  unit  cost  sheet.  It  illustrates  the  value  of  a  scien- 
tific system  as  compared  with  the  more  flexible  plan  of 
basing  rates  on  "intuition." 

As  shown  by  the  following  table,  rates  vary  with  the  dis- 
tance the  freight  is  carried,  though  not  in  the  same  ratio.2 

1  Harrison  v.  D.  <f  W.  B.  Co.,  1908,  2  W.  E.  C.  R.,  805. 

2  Gregory  Bros.  v.  C.  M.  #  St.  P.  B.  Co.,  1908,  2  W.  R.  C.  R.,  797. 


124.      RAILROADS  AND  PUBLIC  UTILITIES 


TABLE  I 
Movement  Costs 


Gross 

Movement 

Movement 

Loading 

Car 

weight  car 

costs 

Total 

cost 

in 

weight  in 

and 

per  gross 

cost  1  car 

for  net 

tons 

tons 

contents 

ton 

mile 

ton 

in  tons 

per  mile 

per  mile 

5 

15 

20 

.287cts 

5.74  cts. 

1 .  148  cts. 

10 

15 

25 

.287 

7.175 

.717 

15 

15 

30 

.287 

8.61 

.576 

25 

15 

40 

.287 

11.48 

.459 

40 

15 

55 

.287 

15.785 

.395 

The  proportionately  increased  rate  for  short  distances,  as 
compared  with  long  distances,  is  largely  due  to  the  fact 
that  the  terminal  expenses  are  as  great  for  a  ton  carried 
ten  miles  as  for  a  ton  transported  one  hundred  miles.1  It 
is  often  found  that  the  terminal  expenses  amount  to  40 
per  cent  or  more  of  the  total  cost.  "Since  they  are  as 
great  for  a  shipment  going  a  short  distance  as  for  one 
going  a  long  distance,  it  follows  that  the  cost  per  ton  mile 
must  also  be  much  greater  in  the  former  case."2  For 
this  reason  rates  for  long  distances  do  not  furnish  any  sat- 
isfactory basis  for  rates  for  short  distances.  Investiga- 
tions made  by  the  Commission  show  that  eliminating  ter- 
minal costs,  the  movement  expenses  "vary  with  the  dis- 
tance and  not  far  from  in  the  same  proportion. ' ' 3 

The  liability  of  damaging  an  article  transported  also 
has  an  influence  on  the  cost  per  unit.  Hazards  are  at- 
tendant in  nearly  every  undertaking.  Consideration  of 
risks  assumed  by  the  carrier  in  transporting  freight  is  an 
element  closely  associated  with  the  value  of  the  article. 

1  7?i  re  Bates  on  Milk  and  Cream,  op.  cit.,  470. 

2  Keogh  Excelsior  Mfg.  Co.,  etc.,  op.  cit.,  749. 

3  In  re  Bates  on  Pulp  Wood,  1908,  2  W.  E.  C.  E.,  275. 


MAKING  OF  RAILROAD  RATES  125 

Where  the  value  is  low,  the  risk  is  low  and  the  rate  charged 
will  show  a  recession  due  to  the  lack  of  influence  by  these 
two  factors.  The  effect  of  risk  in  transporting  articles  is 
considered  in  the  making  of  every  rate  as  shown  by  the 
following  from  the  Commission's  decision: 

The  proportion  of  the  operating  expenses  proper x  that  should 
be  borne  by  each  commodity,  depends  largely  upon  the  cost  of 
ti-ansporting  the  same  and  upon  the  risks  involved  in  this  trans- 
portation. The  cost  in  turn  depends  upon  the  amount  that  can 
be  gotten  into  the  car,  the  density  of  the  traffic,  the  condition  of 
the  road  and  upon  other  factors  of  this  nature.  The  risk  in- 
volved depends  largely  upon  the  value  of  the  articles  and  whether 
they  are  of  such  character  that  they  are  easily  damaged.  The 
proportion  of  the  interest  on  the  investment  that  should  be  borne 
by  each  commodity,  depends  largely  upon  the  value  of  the  prod- 
ucts, competition  and  market  conditions,  the  position  of  the  ship- 
per, and  upon  other  factors  of  a  similar  character.  Usually  the 
rates  should  be  high  enough  to  cover  the  cost  and  the  risk,  and 
contribute  something  toward  interest  on  the  investment 

Aside  from  these  more  specific  elements  that  influence 
the  costs  there  are  other  factors  present  in  individual 
freight-rate  cases,  such  as  the  grades,  the  characteristics 
of  the  road,  and  its  equipment.2  Still  more  important, 
however,  is  the  relatively  greater  movement  expense  for  the 
"way"  freight,  that  stops  at  nearly  every  local  station, 
compared  with  the  "through"  freight,  which  carries  most 
of  the  shipments  that  are  to  go  over  one  hundred  miles.3 
The  latter  covers  approximately  twice  as  many  miles  as  the 
former,  but  the  way  freight  is  usually  more  heavily  loaded 
with  products  bearing  relatively  higher  local  rates.  "The 
cost  per  ton  mile  of  the  movement  expenses  alone  is  often 
three  times  as  great  on  the  way  freight,  as  for  the  through 

1  In  re  Rates  on  Cord  Wood,  1908,  2  W.  R.  C.  E.,  708. 

2  Elbertson  v.  C.  St.  P.  M.  <r  0.  E.  Co.,  1905,  2  W.  R.  C.  R.,  598. 
%Buell,  etc.,  op.  cit.,  490,  494. 


126     RAILROADS  AND  PUBLIC  UTILITIES 

freight  or  long-distance  traffic."1  This  distinction  should 
be  made,  however,  that  the  unusually  rapid  advance  in 
group  rate  schedules  for  short  distances,  a  source  of  com- 
mon complaint,  is  not  based  on  costs,  but  rather  upon  the 
location  of  market  and  other  general  conditions  within  the 
group  territory.  Group  rates  and  trainload  rates  are  not 
encouraged  by  the  Commission,  because  the  schedules  are 
not  predicated  on  a  scientific  rate-making  basis.2 

For  an  accurate  determination  of  these  unit  costs  full 
statistical  information  is  needed  showing  (See  Table  II, 
this  chapter)  number  of  loaded  cars,  number  of  loaded 
car  miles,  average  weight  per  empty  car,  average  weight 
of  load  in  carload  and  less  than  carload  shipments,  aver- 
age gross  weight  per  loaded  car  for  the  leading  commodities 
shipped,  tons  of  freight,  tons  of  freight  carried  one  mile 
and  other  similar  elements.  Given  these  data  the  cost  per 
unit  for  the  different  classes  of  traffic  may  be  computed.3 
This  information  is  not  easily  obtained.  "Through  close 
and  detailed  comparisons  it  has  been  found  that  the  cost  per 
unit  of  transportation  is  about  the  same  on  most  of  the 
roads  that  are  operating  in  this  state.  There  are,  of 
course,  some  variations  in  this  respect,  but  they  are  not 
so  important  as  might  appear  to  be  the  case.  These  varia- 
tions are  mostly  due  to  differences  in  density  and  in  the 
kind  of  traffic. ' ' 4  The  changes  from  year  to  year  in  the 
volume  of  traffic  also  cause  some  variation  in  unit  costs,  but 
variations  thus  arising  are  obviated  by  computing  averages 
for  each  unit  covering  several  years  past. 

"The  data  thus  referred  to  furnishes  the  means  by 
which  the  average  cost  per  loaded  car  and  per  gross  and 
net  ton  of  the  terminal  expenses,  as  a  whole  as  well  as  by 

1  Keogh  Excelsior  Mfg.  Co.,  etc.,  749,  750. 

2  Elbert.ton,  etc.,  op.  tit.,  604;  Edward  Bines  Lumber  Co.  v.  C. 
St.  P.  M.  4-  0.  B.  Co.,  1908,  2  W.  E.  C.  E.,  391. 

8  See  In  re  Bates  on  Pulp  Wood,  1908,  2  W.  E.  C.  E.,  224,  226. 
*In  re  Bates  on  Cord  Wood,  1908,  2  W.  E.  C.  E.,  715. 


MAKING  OF  RAILROAD  RATES  127 

classes,  may  be  obtained  under  the  various  loadings  per 
car,"  says  Commissioner  Erickson  in  discussing  the  con- 
clusions that  may  be  drawn  from  the  calculations.1  ' '  These 
calculations  are  greatly  facilitated  by  the  fact  that  the 
greater  proportion  of  the  terminal  expenses  per  car  are 
about  the  same  when  it  is  heavy  as  when  it  is  lightly  loaded, 
a  fact  that  tends  to  materially  increase  the  importance  of 
the  average  loaded  car. 

' '  From  this  data  mentioned  it  is  likewise  possible  to  de- 
termine the  cost  per  net  ton  per  mile  and  the  cost  per 
gross  ton  per  mile.  The  former  cost  is  had  when  the  move- 
ment expenses  are  distributed  over  the  loaded  car  mileage. 
The  latter  is  had  when  the  cost  per  car  mile  is  distributed 
over  the  gross  weight,  or  on  the  weight  of  both  average 
load  and  the  average  car.  This  cost  per  gross  ton  can 
then  be  so  applied  that  it  is  possible  to  obtain  the  cost  per 
net  ton  per  mile  under  various  kinds  of  loading  and  vari- 
ous other  conditions  that  may  arise. 

"The  unit  costs  which  are  thus  obtained  furnish  the 
data  upon  which  to  compute  the  cost  per  cwt.  to  the  car- 
rier for  transporting  freight  various  distances  under  all 
sorts  of  loading.  In  making  these  computations  it  must 
be  remembered  that  the  terminal  expenses  are  independent 
of  the  distance  the  freight  is  carried,  and  that  they  are 
about  the  same  (See  Table  IV,  this  chapter)  for  a  shipment 
going  one  hundred  miles  as  for  one  going  a  greater  or  less 
distance  than  this  and  that  the  movement  expenses,  on  the 
other  hand,  vary  with  the  haul  and  not  far  from  in  the 
same  proportion." 

Even  after  the  cost  of  the  traffic  units  of  transportation 
has  been  determined,  there  is  still  a  second  predominating 
element  that  enters  into  the  making  of  a  "reasonable"  rate. 
This  is  the  classification  of  the  commodity. 

'Address  before  the  National  Association  of  Railway  Commis- 
sioners, Washington,  1910. 


128     RAILROADS  AND  PUBLIC  UTILITIES 

Strictly  speaking  "classification"  applies  only  to  those 
articles  offered  for  transportation  to  which  special  or  com- 
modity rates  do  not  apply.  Using  it,  however,  in  the  sense 
of  the  relative  charges  between  articles  it  applies  as  well 
to  goods  carried  under  commodity  tariffs.  While  the 
articles  subject  to  commodity  tariffs  are  relatively  few  as 
compared  with  the  articles  governed  by  the  classifications, 
they  are  in  the  main  articles  that  move  in  great  volume, 
so  that  though  comparatively  few  in  number,  they  never- 
theless constitute  the  great  bulk  of  the  freight  tonnage. 
The  fact  that  they  do  move  in  great  volume  makes  it  pos- 
sible to  deal  with  each  one  separately  for  rate  purposes. 
The  articles  which  take  class  rates,  on  the  other  hand,  run 
into  the  thousands  but  do  not  move  in  any  great  quantities. 
Only  a  few  of  the  separate  articles  afford  large  amounts 
of  traffic,  so  that  in  actual  practice  it  has  been  found  con- 
venient, if  not  absolutely  necessary,  to  consider  them  in 
groups  or  "classes."  The  principles  underlying  com- 
modity and  class  rates  are,  generally  speaking,  the  same, 
but  in  working  out  the  two  types  of  rates  there  is  this 
difference,  that  for  commodity  rates  the  costs  of  handling 
the  separate  commodity  are  worked  out  and  then  for  rate 
purposes  modified  by  the  other  factors  entering  into  rate 
structure,  i.  e.,  value,  liability  to  damage,  etc.,  while  for 
class  rates  the  elements  that  affect  costs,  are  considered 
in  conjunction  with  the  other  factors. 

Freight  classifications  are  made  by  committees  com- 
posed of  representatives  of  the  different  railroads  within 
a  specified  territory.  There  is  no  uniform  classification 
applicable  to  the  entire  United  States,  although  several 
attempts  have  been  made  to  formulate  such  schedules.1 

1  Before  the  Interstate  Commerce  Law  of  1887,  nearly  every  road 
had  its  own  classification.  The  requirement  of  the  long-  and  short- 
haul  clause  of  the  act  forced  the  change.  See  Noyes,  American  Rail- 
road Rates,  67. 


MAKING  OF  RAILROAD  RATES  129 

The  impracticability  of  separate  and  conflicting  classifica- 
tions would  seem  to  demand  that  one  single  uniform  classi- 
fication for  the  entire  country  would  be  both  necessary 
and  in  line  with  public  policy. 

At  the  present  time  the  United  States  is  divided  into 
three  classification  territories: 

''Official"  classification  prevails  north  of  the  Ohio  and 
Potomac  rivers  and  east  of  the  Mississippi  River,  excepting 
the  state  of  Wisconsin,  and  the  Michigan  peninsula.  Its 
committee  headquarters  are  in  New  York. 

"Southern"  classification  includes  the  territory  south 
of  the  Ohio  and  Potomac  rivers  and  east  of  the  Mississippi. 
Its  committee  headquarters  are  in  Atlanta. 

"Western"  classification  includes  Wisconsin,  the  north- 
ern peninsula  of  Michigan,  and  all  territory  west  of  the 
Mississippi  River.  Some  of  the  Pacific  Coast  territory  is 
under  a  separate  classification,  but  this  is  considered  as 
a  subdivision  of  the  "western"  classification.  The  com- 
mittee's headquarters  are  in  Chicago. 

In  a  number  of  states  like  Iowa,  Illinois  and  several 
southern  states  separate  state  classifications  are  promul- 
gated by  law.  The  Railroad  Commission  of  Wisconsin  ex- 
ercises the  power  to  change  any  item  in  the  ' '  western ' '  clas- 
sification as  applicable  to  the  state.  The  Wisconsin  law 
specifically  requires  that  the  classification  of  freight  in  the 
state  shall  be  uniform  for  all  railroads.1 

In  the  "western"  classification  all  commodities,  except 
those  included  in  commodity  tariffs,  are  divided  into  five 
numbered  (1-5)  and  five  lettered  (A-E)  classes.  Classes 
1  to  4  cover  shipments  in  less  than  carload  lots  (L.C.L.)2 

1See.  1797-7  Revised  Statutes  of  1913. 

2 ' '  Generally  speaking,  the  chief  features  which  it  seems  necessary 
to  consider  in  determining  the  proper  classification  of  an  article  are 
the  space  occupied  by  each  one  hundred  pounds  of  the  article,  and 
the  value  per  one  hundred  pounds  of  the  same.  The  first  is  supposed 
to  represent  the  amount  of  car  space  which  the  carrier  must  furnish 


130     RAILROADS  AND  PUBLIC  UTILITIES 

and  classes  5  to  E  the  carload  (C.L.)  shipments.  Articles 
of  the  highest  value,  like  dress  goods,  which  take  the  high- 
est rate,  are  put  in  Class  1  for  less  than  carload  and  Class 
"A"  for  carload  shipments,  while  the  lowest  priced  ar- 
ticles and  the  lowest  rates  are  represented  by  classes  4  and 
E,  there  being  a  gradual  reduction  in  both  for  the  inter- 
mediate classes.     Commodity  rates  are  lower  than  Class 

To  determine  the  relationship  of  each  class  within  the 
freight  classification  to  each  other  the  Commission  has 
made  a  compilation  which  shows  that  when  the  rates  for 
Class  1  are  represented  by  100,  the  rates  for  the  other  classes 
bear  roughly  the  following  proportions :  Class  2,  83 ;  Class 
3,  67 ;  Class  4,  50 ;  Class  5,  40 ;  Class  A,  45 ;  Class  B,  35 ; 
Class  C,  30;  Class  D,  25;  and  Class  E,  20.  The  com- 
pilation shows  that  taking  the  classification  as  it  stands  the 
average  rate  under  the  average  loading  for  the  entire  traf- 

in  the  transportation  of  the  article  and  the  second  is  supposed  to 
represent  in  a  general  way  the  risk,  which  the  carrier  assumes,  as 
well  as  the  ability  of  the  commodity  to  be  transported  to  bear  a  cer- 
tain rate.  Having  determined  the  number  of  cubic  feet  of  car 
space  occupied  by  one  hundred  pounds  of  an  article,  and  the  value 
of  one  hundred  pounds,  both  expressed  decimally,  these  two  items 
are  added  together  and  constitute  what  has  been  termed  a  classifica- 
tion unit.  This  is  not  an  exact,  but  rather  an  approximate  unit, 
which  serves  the  purpose  of  comparison  with  articles  already  in  the 
classification,  or  with  articles  still  to  be  added  to  the  valuation.  A 
certain  number  of  classification  units  are,  theoretically  at  least,  re- 
quired of  all  of  the  commodities  in  a  certain  class.  For  instance,  an 
article  which  represents  between  15  and  20  units  falls  into  the  first 
class;  an  article  which  represents  between  10  and  15  classification 
units  falls  into  the  second  class;  between  5  and  10  units  third  class; 
5  or  fewer  units  fourth  class.  These  units  may  be  regarded  as  index 
numbers  giving  the  clue  to  the  correct  classification  of  any  particular 
article.  Obviously,  a  large  number  of  different  considerations  enter 
into  the  classification  of  thousands  of  articles,  and  a  unit  rule  of 
this  kind  must  be  regarded  as  applicable  only  in  a  general  way." — 
Med  ford  Fruit  Package  Co.  v.  TV.  C.  B.  Co.  et  al.,  1906,  1  W.  E.  C.  E., 
47. 

1In  re  Bates  on  Pulp  Wood,  op.  cit.,  227. 


MAKING  OF  RAILROAD  RATES  131 

fie  is  denoted  by  28,  which  would  be  a  rate  between  classes 
C  and  D,  as  shown  in  Table  IV  of  this  chapter.  When 
Class  1  is  represented  by  100  it  follows  that  the  rates  for 
articles  in  this  class  should  be  3.6  greater  than  this  average, 
Class  E,  70  per  cent  of  the  average  and  the  rates  for  the 
other  classes  should  bear  the  same  relative  proportions. 

"This  adjustment  of  rates  may  be  considerably  im- 
proved upon  if  the  less  than  carload  and  the  carload  rates 
are  dealt  with  independently  of  each  other, ' ' 1  declares 
Commissioner  Erickson.  "That  this  is  the  case  is  shown 
when  in  similar  computations  of  the  figures  used  herein, 
the  position  of  the  former  is  placed  at  75  and  that  of  the 
latter  at  23." 

As  already  indicated  in  the  discussion  of  classification, 
there  are  several  minor  elements  upon  which  the  classifica- 
tion is  built  that  are  considered  by  the  Commission  in  de- 
termining the  weight  of  this  factor  as  entering  into  the  mak- 
ing of  "reasonable"  rates.  These  elements  are:  (a)  value  of 
the  article,  (b)  relationship  of  rates  between  classes,  (c) 
comparison  of  rates  for  similar  service,  (d)  competitive 
relations  of  articles  and  carriers,  (e)  commercial  and  lo- 
cal conditions. 

The  primary  consideration  in  the  classification  of 
freight  is  the  value  of  the  article  transported.  This  is  the 
first  factor  that  must  be  considered  in  the  classification  in 
the  adjustment  of  rates.2  On  this  point  the  Commission 
says: 

The  cost  is  the  first  element  that  should  be  determined  3  and 
this  cost  should  then  be  modified  by  "what  the  traffic  will  bear." 


1  Address  before  the  National  Association  of  Eailway  Commission- 
ers, Washington,  1910,  32-33. 

2  Webb  Produce  Co.  v.  C.  cf  N.  W.  B.  Co.,  1908,  3  W.  E.  C.  E., 
36;  Milwaukee-Waukesha  Brewing  Co.  v.  C.  $  N.  W.  B.  Co.,  1910,  5 
W.  E.  C.  E.,  549. 

3  In  re  Bates  on  Milk  and  Cream,  1908,  2  W.  E.  C.  E.,  465-466. 


132     RAILROADS  AND  PUBLIC  UTILITIES 

Under  these  methods  of  fixing  rates  articles  of  a  high  value  and 
high  cost  will  be  charged  higher  rates  than  articles  of  low  value 
and  low  cost.  Genei'ally  speaking  no  rate  should  be  lower  than 
sufficient  to  cover  operating  expenses  and  to  contribute  at  least 
a  small  amount  toward  the  interest  upon  the  investment.  There 
are  perhaps  conditions  under  which  exceptions  to  this  may  be 
warranted,  but  they  should  not  be  numerous  or  general.  No  rates 
should  be  so  high  as  to  interfere  with  the  free  and  unhampered 
movement  of  the  goods,  or  yield  unreasonably  high  profits  when 
the  situation  as  a  whole  is  considered.  Between  these  two  ex- 
tremes, or  between  the  upper  and  lower  level,  there  may  be  al- 
most all  sorts  of  rates.  Some  may  be  close  to  the  bottom;  others 
may  be  close  to  the  top;  while  still  others  may  be  midway  be- 
tween the  two  limits. 

On  the  high-priced  article  the  rate  of  transportation  consti- 
tutes only  a  small,  perhaps  insignificant,  proportion  of  its  value. 
An  equally  high  rate  on  some  other  or  low-grade  commodity  might 
easily  prove  prohibitive  and  prevent  its  shipment  entirely.  In 
other  words,  low-grade  commodities  cannot  bear  as  high  rates  as 
high-grade  ones.  That  rates  should  be  so  adjusted  as  not  to  pre- 
vent a  reasonably  free  and  unhampered  exchange  of  products  is  of 
the  greatest  importance  from  both  the  economic  and  social  point  of 
view.  When  it  is  found  that  certain  commodities  cannot  bear 
rates  that  will  cover  operating  expenses  plus  their  equal  pro- 
portion of  a  reasonable  profit  on  the  investment,  and  that  there 
are  other  commodities  which  can  bear  these  costs  and  something 
besides,  it  is  usual,  and,  for  the  reasons  given,  in  line  with  the 
best  interests  of  both  the  carriers  and  the  public,  to  so  adjust 
the  rates  that  the  former  are  made  to  contribute  less  and  the 
latter  more  than  their  equal  proportions  of  the  interest  on  the 
investment. 

There  are  commodities  which  could  not  be  moved  under  higher 
rates  than  just  about  sufficient  to  cover  operating  costs  and  a 
small  amount  in  the  way  of  profits.  On  the  other  hand,  there  are 
a  large  number  of  commodities  which  can  bear  high  rates  that 
will  not  only  cover  operating  expenses,  but  yield  a  very  hand- 
some surplus  above  these  expenses,  to  be  applied  as  interest  or 
profits  to  the  investment.     These  facts  must  be  taken  into  con- 


MAKING  OF  RAILROAD  RATES  133 

sideration  as  a  matter  of  both  business  and  public  policy.  It  fol- 
lows that  the  justice  or  fairness  of  each  particular  rate  in  the 
schedules,  or  in  effect,  depends  upon  the  care  and  accuracy  with 
which  the  freight  is  classified,  and  with  which  the  rates  of  charges 
for  each  of  these  classes  are  adjusted. 

Under  these  principles  it  will  be  found  that  in  examin- 
ing rate  schedules,  saw  logs  and  crushed  stone  bear  the 
lowest  possible  commodity  rates,  while  the  other  extreme 
is  represented  by  the  high  rates  on  dress  goods. 

The  proportional  relationship  of  rates  to  each  other  for 
different  articles  carried  is  embodied  in  the  freight-rate 
classification  that  is  subject  to  supervision  and  change  by 
the  Commission.  It  is  an  element  that  enters  into  the 
making  of  a  final  rate.  Here  the  doctrine  of  charging 
"what  the  traffic  will  bear"  would  seem  to  have  a  prac- 
tical application.  Regarding  this  rate  relationship  the 
Commission  says: 

The  relation  which  the  rates  on  the  various  classes  of  1  freight 
and  the  various  commodities  ought  to  bear  to  each  other  are 
largely  questions  of  classification.  It  depends  upon  such  factors 
as  the  value  of  the  articles,  their  bulk  in  proportion  to  their 
weight,  the  risks  involved,  the  nature  of  the  articles  generally, 
and  on  many  other  factors. 

Another  element  to  be  considered  by  the  Commission 
is  a  comparison  of  the  same  rates  for  similar  service.  This 
is  not  as  important  an  element  as  the  other  factors,  al- 
though it  has  a  bearing  in  individual  eases.  Comparison 
of  rates  is  not  considered  a  safe  basis  for  rate-making. 
The  rates  with  which  comparison  is  made  may  be  unreason- 
able or  the  result  of  peculiar  conditions.    While  a  compara- 

1  Wis.  Pulp  cf-  Paper  Mfrs.  v.  C.  #  N.  W.  E.  Co.  et  al,  1910,  6 
W.  R.  C.  R.,  455,  849 ;  also  see  National  Refining  Co.  et  al.  v.  C.  4~ 
N.  W.  B.  Co.,  1910,  6  W.  R.  C.  R.,  333,  843. 


134     RAILROADS  AND  PUBLIC  UTILITIES 

tive  process  will  eliminate  discriminations  between  ship- 
pers, it  may  also  have  the  effect  of  allowing  too  high  a 
return  upon  the  investment.1  Its  every  aspect  must  be 
carefully  scrutinized  before  accepted.  That  the  condition 
which  surrounds  the  industry  as  a  whole  is  an  element, 
however,  to  be  taken  into  consideration  with  other  factors, 
is  indicated  by  the  following  from  a  Commission's  deci- 
sion : 

While  a  comparison  of  the  rate  in  controversy  in  the  present  2 
case  with  other  rates  does  not  in  and  of  itself  establish  the  unrea- 
sonableness of  the  former,  yet  where  conditions  are  not  dis- 
similar and  the  cost  of  transportation  is  not  greater,  it  would 
seem  that  the  variance  in  the  rates  is  not  justified. 


A  typical  illustration  of  the  use  of  comparative  rates 
may  be  found  in  the  investigation  conducted  by  the  Com- 
mission into  the  pulp  wood  rates  in  the  state.  It  found 
that : 

< 
The  rates  in  Minnesota  are  about  the  same  as  in  Wisconsin.3 

The  rates  in  New  York  are  lower  to  some  points  and  higher  to 
others  than  the  rate  in  Wisconsin.  The  rates  in  Michigan,  Maine, 
New  Hampshire,  Tennessee  and  Virginia  are  from  14  to  60  per 
cent  lower  than  the  rates  for  like  distances  in  Wisconsin.  As 
the  paper  produced  in  all  of  these  states  seems  to  come  in  com- 
petition with  the  paper  produced  in  Wisconsin,  these  differences 
in  the  rates  on  the  raw  material  are  an  element  that  should  receive 
some  consideration  in  this  case. 

1  Milwaukee-Waukesha  Brewing  Co.,  op.  cit.,  549,  852;  Mingle  et 
al.,  etc.,  op.  cit.,  600,  832;  Wisconsin  Lakes  Ice  and  Cartage  Co.  v. 
C.  <$■  N.  W.  B.  Co.,  1912,  9  W.  E.  C.  E.,  109,  628;  Wausau  Paper 
Mills  Co.  v.  C.  M.  <f  St.  P.  B.  Co.,  1912,  9  W.  E.  C.  E.,  404. 

2Erouskop  v.  C.  M.  #  St.  P.  B.  Co.,  1910,  6  W.  E.  C.  E.,  186,  842. 

8  In  re  Pulp  Wood  Bates,  op.  cit.,  218-220;  see  comparison  of 
rates  with  other  similar  forest  products,  174. 


MAKING  OF  RAILROAD  RATES  135 

Again  competitive  conditions  must  be  considered.  Com- 
petition would  seem  to  be  a  stronger  factor  as  between  ar- 
ticles than  between  carriers.  It  may  be  so  strong  in  some 
industries  as  to  prevent  producers  entering  certain  mar- 
kets. Unless  this  element  is  recognized  and  unless  consid- 
ered it  may  prevent  the  movement  of  a  certain  article  of 
freight  that  will  bear  a  small  share  in  the  necessary  oper- 
ating expenses  and  profits.  The  question  has  been  touched 
upon  in  numerous  decisions,  thus: 

Another  important  element  that  enters  into  the  question  x  of 
what  rates  the  traffic  can  fairly  bear  is  found  in  competitive 
conditions.  It  is  often  found  that  competition  is  so  strong  that 
the  regular  rate  of  transportation  would  entirely  prevent  pro- 
ducers from  entering  certain  markets.  Whenever  such  conditions 
are  met  with  it  is  often  to  the  best  interests  of  both  the  carriers 
and  the  community  that  they  shall  be  fully  considered  in  adjust- 
ing the  freight  rates.  If  a  slight  shading  in  the  rates  will  enable 
the  articles  to  move,  and  if  this  shading  can  be  made  without  un- 
just discrimination,  it  is  usually  best  for  all  concerned  that  it 
should  be  made.  ...  It  is  undoubtedly  a  fact 2  that,  for 
strictly  competitive  undertakings,  even  so  small  an  amount  as 
one  cent  per  cwt.  on  the  raw  material  may  prove  quite  detrimen- 
tal. .  .  .  The  practice  usually  is  to  accept  the  traffic  at  the 
best  rates  it  can  be  had  provided  the  revenue  derived  therefrom  is 
sufficient  to  cover  the  extra  cost  of  handling  this  traffic  when 
something  is  included  in  this  cost  for  returns  upon  the  investment, 
and  provided  further,  that  the  rates  and  terms  at  which  it  is  so 
accepted  are  not  unjustly  discriminatory. 

The  final  factor  to  be  considered  is  in  reality  only  a 
corollary  of  the  principle  of  competition  above  stated.  Lo- 
cal and  commercial  conditions  sometimes  have  an  effect  on 
the  making  of  a  reasonable  rate.     It  has  been  recognized 

1  Milwaukee-Waukesha  Brewing  Co.,  op.  cit.,  186,  842. 

2  Webster  Mfg.  Co.  v.  C.  St.  P.  M.  <f  0.  E.  Co.,  1910,  5  W.  R.  C.  R., 
96,  97. 


136     RAILROADS  AND  PUBLIC  UTILITIES 

as  an  independent  element  in  a  number  of  cases,  as  shown 
by  the  following  paragraphs : 

The  effect  of  special  and  local  conditions  at  various  *  points 
enters  more  or  less  strongly  in  the  fixing  of  commodity  rates. 

The  most  important  element  in  the  fixing  of  rates  is  the  2  cost 
of  the  service,  subject  to  modifications  by  reason  of  commercial 
conditions,  such  as  the  value  of  the  article  carried,  the  competi- 
tive situation  of  both  the  producer  and  the  carrier. 

The  needs  of  the  shipper  and  of  the  community  should  also  3 
be  taken  into  account  in  rate-making.  But,  important  as  these 
elements  are,  they  are  not  often  the  only  ones  to  be  considered. 

Not  every  element  mentioned  is  of  the  same  force  and 
importance  in  every  case.  Summarizing  our  examination, 
we  find  that  the  two  elements  that  control  the  rate-making 
situation  are  the  unit  cost  of  the  service  and  the  classi- 
fication of  the  article.  The  others  are  modifying  factors. 
Three  tables  have  been  prepared  by  Commissioner  Erick- 
son  to  illustrate  the  method  of  rate-making  described  in 
this  chapter.  Table  II,  already  referred  to,  contains  a 
statement  of  the  general  condition  of  the  road,  its  finances, 
its  traffic,  mileage,  with  a  reduction  of  the  data  into 
unit  costs.  Table  III  shows  the  amount  of  freight 
of  each  class  carried  and  the  revenue  produced.  See 
pages  140-142. 

Using  the  facts  in  Tables  II  and  III,  and  applying  them 
to  the  elements  of  movement  cost,  terminal  expense,  and 
other  factors  in  the  classification,  Table  IV  of  normal  unit 
costs  for  each  class  of  commodity  carried  various  distances 
is  produced.  These  tariffs,  when  applied  to  practical  cases, 
are  sometimes  modified  by  competition  and  commercial 
conditions  explained  above.     They  are  so  computed  as  to 

1  Mingle  et  al.,  etc.,  601. 

2  Ibid.,  600. 

3  Elbertson  v.  C.  St.  P.  M.  #  0.  B.  Co.,  1908,  2  W.  E.  C.  E.,  600. 


MAKING  OF  RAILROAD  RATES  137 

yield  an  average  return  of  8  per  cent  on  the  cost  of  the 
road,  which  on  the  basis  of  the  physical  value  of  the  prop- 
erty, described  in  an  earlier  chapter,  is  fixed  at  $35,000  a 
mile.  In  Table  IV,  the  rate  of  return  on  the  less  valuable 
classes  of  freight  is  computed  low,  compared  with  the  rate 
allowed  on  the  articles  that  are  shipped  in  the  higher 
classes. 

Higher  cost  of  way  freight  compared  with  through 
freight  has  also  been  recognized  in  Table  IV.  Way  freight 
usually  requires  about  a  hundred-mile  haul.1  Reference  to 
the  table  based  on  cost  units  discloses  the  diminution  of  the 
rate  ratios  with  the  distance  of  the  haul  and  the  relative 
importance  of  the  terminal  charge  in  all  short  hauls,  re- 
gardless of  the  class  of  freight  carried.  The  data  at  the 
bottom  of  Table  IV  gives  ratios  per  cwt.  for  various  classes 
and  lengths  of  haul.  The  average  cost  per  cwt.  is  about 
7.3  cents  for  the  average  load,  the  average  length  of  haul 
(147  miles),  which  falls  between  classes  C  and  D.  (Table 

Bearing  in  mind  the  ratios  of  different  classes  within 
the  classification  schedule  to  each  other,  as  already  ex- 
plained, a  typical  illustration,  taken  from  Table  II,  will 
elucidate  best  the  method  used  in  making  the  classifications 
in  Table  IV.  Take  as  an  illustration  the  determination  of 
a  rate  for  a  Class  1  article  going  the  first  ten  miles  or  less. 
The  average  hauling  cost  per  cwt.  per  mile  for  the  aver- 
age load  of  15  tons  is  .287  mill  (Table  II).  As  previ- 
ously stated,  in  discussing  the  question  of  classification, 
the  position  of  the  average  rate  under  average  loading  for 
the  traffic  as  a  whole  may  be  denoted  by  28,  which  is  found 
somewhere  between  classes  C  and  D.  A  Class  1  rate  will  be 
five  times  greater  than  a  Class  E  rate  and  3.5  greater  than 
the  average  rate. 

Applying  these  principles,  this  gives  an  average  rate  of 

1  Buell,  etc.,  op.  cit.,  488. 


138     RAILROADS  AND  PUBLIC  UTILITIES 

(.287  mill  x  3.5)  1  cent  per  cwt.  as  a  Class  1  rate  for  the 
first  ten  miles  of  haul.  Another  factor  now  enters.  It 
costs  50  per  cent  more  for  movement  expenses  to  operate 
a  way  freight,  that  runs  less  than  one  hundred  miles  dis- 
tance, than  a  through  freight.  For  a  Class  1  article  car- 
ried ten  miles  or  less  this  would  give  a  movement  rate  of 
1.5  cents  per  cwt.  When  the  highest  terminal  rate  of  8.4 
cents  1  (Table  II)  per  cwt.  is  added,  it  makes  a  total  cost 
per  cwt.  of  9.9  cents  for  the  first  ten  miles  of  haul.  For 
the  first  one  hundred  miles  the  movement  expense  is  in- 
creased at  a  rate  of  1.5  cents  per  cwt.,  first  class,  for  each 
ten  miles  distance  the  goods  are  carried. 

Theoretically  there  should  be  separate  tariffs  for  way 
and  through  freight.  These,  however,  have  been  combined 
in  one  table.  The  movement  rates  under  one  hundred  miles 
have  been  increased  on  the  basis  of  data  collected  by  the 
Commission  as  to  the  respective  cost  of  the  two  kinds  of 
traffic.  This  gives  higher  rates  for  way  freight.  For  each 
ten-mile  unit  between  one  hundred  and  two  hundred  miles 
the  rate  is  increased  at  a  ratio  of  one-third  of  the  move- 
ment cost  for  the  first  ten  miles  of  haul.  When  two  hun- 
dred miles  is  reached  the  original  average  movement  rate 
of  1  cent  for  each  ten-mile  unit  has  again  been  obtained 
(First  class  two  hundred  miles  the  rate  is  28.10  per  cwt. 
less  8.40  terminal  expense,  gives  a  movement  expense  of  20, 
which  divided  by  20  ten-mile  units  gives  an  average  1  cent 
rate)  and  this  basic  rate  is  used  for  ten-mile  units  there- 
after. The  same  principles  of  tariff-making,  explained 
here,  apply  to  the  making  of  rates  for  other  classes  of 
freight  shipped  various  distances. 

Data  in  Tables  II,  III  and  IV  are  based  on  the  traffic 
of  a  line  taken  as  a  whole.  As  most  carriers  operate  in 
more  than  one  state,  a  division  between  interstate  and  in- 

1  This  high  terminal  rate  is  also  apportioned  so  that  Class  E  is 
one-fifth  of  the  Class  1  terminal  rate. 


MAKING  OF  RAILROAD  RATES  139 

trastate  earnings  is  often  necessary.1  It  is  a  difficult 
process  but  not  impossible.  The  accounts  of  the  cost  of 
transportation  are  usually  kept  by  divisions.  It  has  been 
found  that  40  per  cent  of  the  cost  items  can  be  immediately 
located. 

The  efficacy  of  the  cost  system  of  rate-making  is  at 
once  apparent.  Its  foundation  rests  upon  the  facts  de- 
rived from  the  operation  of  the  road.  Ordinarily  two 
hours  of  one  Wisconsin  commissioner's  time  is  required 
every  day  to  settle  rate  problems.  In  that  time  from 
twenty  to  one  hundred  rates  are  made  or  remade — an  av- 
erage of  about  forty  a  day. 

Some  of  the  cost  data  compiled  by  the  Commission  can 
be  used  in  computing  any  rates,  as  the  variation  in  units 
between  the  different  carriers  in  the  state  is  but  slight. 
Much  of  it  must  be  gone  over  for  every  article  shipped  be- 
tween any  two  stations.  The  more  rates  involved  the  more 
laborious  is  the  task.  It  is  estimated  that  in  the  recent  ex- 
press rate  case  before  the  Commission  at  least  1,000,000 
"basing  rates"  were  involved.  When  the  Interstate  Com- 
merce Commission  made  its  decision  on  the  same  subject  it 
changed  the  method  of  basing  rates  to  the  "zone  system" 
and  the  number  of  separate  rates  was  reduced.  It  in- 
volved, however,  130,000  separate  rate  computations  to 
bring  about  uniformity  between  the  decisions.  Because 
of  the  local  pick-up  and  delivery  service,  and  specific 
contracts  between  carriers  and  the  companies  in  many 
cases,  express  rates  are  higher  than  first-class  freight 
rates.2 

Other  state  commissions  using  less  definite  and  scientific 
methods  have  been  overruled  in  the  courts  many  times  in 
rate  cases.  Not  a  freight  rate  made  by  the  Wisconsin  Com- 
mission has  suffered  a  reversal. 

1  Buell,  etc.,  op.  cit.,  496. 

2  In  re  Bates  on  Milk  and  Cream,  op.  cit.,  468. 


140     RAILROADS  AND  PUBLIC  UTILITIES 

TABLE  II 

Statement  Showing  Some  of  the  Data  from  Which  the  Rate 

Schedule  was  Compiled 

Operating  expenses  and  taxes $  22,952,930 

Interest  at  8  per  cent  on  $133,525,000 10,2S2,000 

Total  expenses $33,234,930 

Proportion  of  expenses  chargeable  to  freight  traffic 71  per  cent 

Proportion  of  terminal  expenses  of  total  freight  expenses.  .  40  per  cent 

Total  number  of  loaded  cars 1,156,400 

Total  number  of  loaded  car-miles 166,5SS,200 

Average  weight  per  empty  car 15  tons 

Average  weight  of  load  in  loaded  car 15  tons 

Average  gross  weight  per  loaded  car 30  tons 

Tons  of  freight  carried 16,396,709 

Tons  of  freight  carried  one  mile.  .  . 2,431, 794, S27 

Average  distance  each  ton  was  carried  about 147  miles 

Length  of  main  track 3,815  miles 

Estimated  cost  per  mile $35,000 

Total  cost  whole  line $135,525,000 

Operating  expenses  and  taxes  charged  to  freight  traffic.  .  $16,296,583 

Interest  charged  to  freight  traffic 7,589,220 

$23,885,803 
Operating  expenses  and  taxes  charged  as  terminal  expenses  $6,035,68S 
Operating  expenses  and  taxes  charged  as  movement  ex- 
penses   9,777,950 

Interest  charged  as  movement  expenses 4,553,532 

Terminal  operating  expenses  and  taxes  per  loaded  car ...  5 .  70 

Terminal  interest  charges  per  loaded  car 2. 70 

Total  terminal  expenses  per  loaded  car. 8.40 

Terminal  expenses  per  cwt.  when  car  is  loaded  with  15 

tons  of  freight _ 2.80  cts. 

Terminal  expenses  per  cwt.  when  car  is  loaded  with  20  tons 

of  freight 2. 10  cts. 

Terminal  expenses  per  cwt.  when  car  is  loaded  with  5  tons 

of  freight 8.40  cts. 

Movement  operating  expenses  and  taxes  per  loaded  car- 
mile  5 .  87  cts- 

Movement  interest  charges 2 .  74  cts" 

Total  movement  expenses  per  loaded  car-mile 8.61  cts. 

Average  movement  expenses  per  gross  ton  per  mile  (8.61 

cts.  per  L.C.M.  *  30  Gr.  T.  per  L.C.  per  mile) .287  ct. 

Movement  expenses  per  net  cwt.  per  mile  when  car  is 
loaded  with  15  tons  of  freight  (.2S7  ct.  per  Gr.  T.  per 

mile  X  30  Gr.  T.  =  8.610.     S.610  -h  300  =  .287  mill)  .287  mill 
Movement  expenses  per  net  cwt.  per  mile  when  car  is 
loaded  with   20   tons  freight    (.287    X    35    =    1,435. 

1,435  -r  400  =  .251  mill) .251  mill 


MAKING  OF  RAILROAD  RATES 


141 


TABLE  II—  (Continued) 

Statement  Showing  Some  of  the  Data  from  Which  the  Rate 
Schedule  was  Compiled 


Movement  expenses  per  net  cwt.  per  mile  when  car  is 
loaded  with  5  tons  of  freight  (287  X  20  =  5,740. 
5,740  +  100  =  .574  mill) 


.574  mill 


TABLE  III 

Freight  in  Each  Class  and  the  Average  and  Total  Revenue 

From  the  Same 


Classes 

Tons 
one  mile 

Cents  per 
ton-mile 

Total 
Revenue 

1     

43,000,000 
43,000,000 
43,000,000 
43,000,000 
105,500,000 

90,000,000 
150,000,000 
226,500,000 
310,000,000 
550,000,000 

627,800,000 

3.50 
2.90 
2.32 
1.75 
1.40 

1.60 

1.22 

1.06 

.87 

.71 

.61 

$1,505,000 

2 

1,247,000 

3 

998,000 

4 

744,000 

5 

1,497,000 

A 

1,444,000 

B 

1,830,000 

C 

2,419,000 

D 

4,439,000 

E 

3,930,000 

3,850,000 

2,431,800,000 

0.98 

$23,885,000 

142     RAILROADS  AND  PUBLIC  UTILITIES 


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CHAPTER   X 

MAKING   OF    UTILITY   BATES 

Both  the  public  and  the  investor  find  the  subject  of 
utility  rates  of  primary  importance.  The  price  charged 
for  the  service  determines  the  income  of  the  utility  and  the 
sacrifices  that  the  individual  must  make  to  obtain  the  ser- 
vice. Unreasonable  rates,  discriminatory  or  excessive,  are 
•contrary  to  good  public  policy.  If  the  rates  are  unjust 
or  preferential,  money  is  wrongfully  transferred  from  the 
pockets  of  one  consumer  to  another.  Eates  must  be  scien- 
tifically adjusted  so  that  each  consumer  pays  for  the  cost 
of  his  service.  They  must  be  high  enough  to  attract  capital 
legitimately  into  the  enterprise,  but  they  should  be  low 
enough  to  yield  only  reasonable  profits  above  interest  and 
depreciation  upon  a  fair  value  of  the  property.  Rates  that 
are  too  low  result  ultimately  in  poor  service,  the  crippling 
of  development,  and  sometimes  in  a  discontinuance  of  the 
service.1 

Wisconsin  public  utility  rates,  as  computed  by  the  Com- 
mission, are  prepared  on  the  cost  of  the  service  basis.  To 
determine  these  rates  requires  the  fullest  information  as 
to  the  value  of  the  property,  the  total  cost  of  each  branch 
of  the  service,  a  detailed  analysis  of  output,  a  classification 
of  the  items  of  expense  and  a  just  apportionment  of  these 
items  among  the  departments  rendering  service.     It  takes 

1  In  the  preparation  of  this  chapter  the  writer  has  drawn  from 
two  papers  prepared  by  Commissioner  Erickson  on  ' '  The  Making 
of  Water  Eates"  and  "Rates  for  Electric  Current,"  both  of  which 
are  extensive  discussions  of  the  technique  of  the  subjects  treated. 

143 


144     RAILROADS  AND  PUBLIC  UTILITIES 

into  consideration  depreciation,  interest  on  investment  and 
profit  and  the  character  of  the  service  rendered.1  The 
processes  followed  in  determining  the  rates  for  each  class 
of  utility  are  similar.  For  the  purpose  of  making  a  full 
explanation  of  the  method,  the  distribution  of  the  expenses 
and  the  making  of  cost  of  service  rates  for  a  water  com- 
pany are  selected  as  an  example. 

Total  expenses  are  analyzed  to  determine  the  proper 
cost  units.  These  expenses  depend  upon  three  important 
factors : 2 

Consumer  expense. 

Demand  or  capacity  expense. 

Output  cost. 

What  is  meant  by  consumer  expense,  involving  such 
items  as  the  cost  of  reading  meters,  is  self-evident.  The 
Commission  in  a  leading  case  on  the  subject  of  unit  water 
costs  said : 3 

Having  determined  the  total  cost  of  the  service,  the  next  prob- 
lem is  to  so  distribute  this  cost  that  all  of  the  different  classes  of 
consumers  will  bear  their  just  share  of  the  burden.  Before  the 
extent  of  this  burden  can  be  ascertained,  it  is  necessary  to  sep- 
arate the  operating  expense  into  capacity  and  output  expenses. 
The  Commission  has  repeatedly  pointed  out  the  distinction  be- 
tween capacity  and  output  expenses.  In  every  business  there  are 
certain  expenses  which  are  directly  dependent  upon  the  output. 
As  the  output  increases  or  decreases,  these  expenses  will  increase 
or  decrease.     But  there  is  a  large  class  of  expenses  which  are 

1  See  data  on  life  of  utilities,  In  re  Fond  du  Lac  Water  Co.,  1910, 
5  W.  R.  C.  R.,  502,  817. 

2  Cases  followed  in  the  apportionment  over  output,  capacity  and 
consumer  expenses:  Dick  et  al.  v.  Madison  Water  Commission,  1910, 
5  W.  R.  C.  R.;  City  of  Janesville  v.  Janesville  W.  Co.,  1911,  7  W.  R. 
C.  R.,  651,  789;  Fitzgerald  et  al.  v.  City  of  Tomahawk,  1911,  8 
W.  R.  C.  R.,  40,  47,  761;  City  of  Marinette  v.  City  Water  Co.  of 
Marinette,  1911,  8  W.  R.  C.  R.,  365,  761. 

3  Dick  et  al.  v.  Madison  Water  Commission,  1910,  5  W.  R.  C.  R., 
757,  803. 


MAKING  OF  UTILITY  RATES  145 

incurred  more  or  less  independently  of  the  output.  To  maintain 
a  water  plant  in  readiness  to  supply  service  requires  a  large  ex- 
pense, although  no  demand  may  ever  be  made  upon  the  system. 
Some  expenses  partake  of  the  nature  of  both.  These  must  be 
distributed  over  capacity  and  output  as  nearly  as  it  can  be  done. 
Again,  some  expenses  are  directly  chargeable  against  the  munici- 
pality, or  against  some  other  class  of  consumers. 

After  these  three  costs  have  been  obtained,  the  items 
are  again  allocated  between  the  different  departments  of 
the  service,  and  again  over  the  different  classes  of  consum- 
ers. To  obtain  these  results,  entails  an  analysis  of  a  maze 
of  accounts  and  data  to  determine  the  actual  unit  cost  of 
service. 

In  practically  every  water  plant  two  distinct  services 
are  rendered: x  (1)  The  supplying  of  large  quantities  of 
water,  usually  under  high  pressure,  for  relatively  short 
periods  of  time  for  fire  protection.  This  is  a  public  use.  (2) 
The  supplying  of  water  at  all  times  for  commercial  and  in- 
dustrial uses.    This  is  a  private  purpose. 

Until  scientific  investigations  were  made  by  the  Com- 
mission there  seems  to  have  been  a  general  opinion,  espe- 
cially where  municipal  plants  were  operated,  that  the  com- 
mercial and  industrial  revenues  should  pay  the  entire  cost 
of  operating  the  plant.  Even  privately  owned  plants,  op- 
erated under  a  franchise,  seemed  to  incline  toward  this 
position. 

There  appears  to  be  a  wide  difference  of  opinion  be- 
tween engineering  authorities  as  to  what  proportion  of  the 
total  expense  should  be  borne  by  each  class  of  consumers. 
Some  contend  that  the  fire  service  should  pay  interest  only 
on  the  excess  investment  above  what  would  be  required  of 
a  plant  to  render  general  service.     Others  claim  that  the 

1  Dick  et  al.  v.  Madison  Water  Commission,  1910,  5  W.  E.  C.  R., 
757,  803. 


146     RAILROADS  AND  PUBLIC  UTILITIES 

plants  are  more  often  designed  for  fire  protection  and  the 
serving  of  private  users  is  incidental.  The  Commission,  in 
its  decisions,  considers  that  both  branches  are  coordinate.1 
Each  bears  the  burden  of  interest,  depreciation  and  prof- 
its, according  to  the  apportionment  of  the  existing  plant 
based  on  the  relative  cost  of  separate  systems.2 

"The  proportion  of  the  investment  necessary  for  the 
public  service  may  vary  somewhat,  depending  upon  the 
local  conditions,"  says  the  Commission  in  a  recent  deci- 
sion.3 It  has  been  held  by  the  engineers  and  water-works 
men  whose  experience  and  study  of  the  question  makes 
their  opinion  of  weight,  that  this  proportion  will  but  sel- 
dom, if  ever,  go  below  50  per  cent  of  the  cost  of  the  plant 
and  system.  In  those  cases  where  the  Commission  has  in- 
vestigated the  matter  in  detail  and  has  made  a  separation 
between  public  and  private,  or  domestic  use,  the  propor- 
tion of  total  investment  chargeable  to  public  use  has  been 
found  greatly  to  exceed  50  per  cent. 

The  demand  which  the  plant  must  be  able  to  meet  at 
any  time,  and  the  amount  of  water  pumped  or  supplied 
to  consumers,  and  the  number  of  consumers  to  be  supplied, 
influence  the  operating  expenses  of  the  plant.4  The  clas- 
sification of  the  operating  expenses  depends  largely  upon 
the  nature  of  the  different  expense  items.  Not  all  expenses 
depend  entirely  upon  the  amount  of  water  pumped.    A  de- 

lCity  of  Ashland  v.  Ashland  Water  Co.,  1909,  4  W.  R.  C.  E.,  297, 

806. 

*  Leading  cases  followed  in  apportionment  of  investment  between 
public  and  private  use:     City  of  Ashland  v.  Ashland  Water  Co.,  1909, 

4  W.  R.  C.  R.,  273;  City  of  Bipon  v.  Bipon  Light  and  Water  Co., 
1910,  5  W.  R.  C.  R.,  1,  66;  DicTc  et  al.  v.  Madison  Water  Commission, 
19 lo',  5  W.  R.  C.  R.,  731,  757,  and  City  of  Beloit  v.  Beloit  Water, 
Gas  and  Electric  Co.,  1911,  7  W.  R.  C.  R,,  187,  310. 

8  In  re  Application  Jefferson  Municipal  El.  Lt.  $  W.  Plant,  1910, 

5  W.  R.  C.  R.,  578,  803. 

'City  of  Ashland  v.  Ashland  W.  Co.,  1909,  4  W.  R.  C.  R.,  273, 

286,  292,  295,  805. 


MAKING  OF  UTILITY  RATES  147 

crease  in  the  amount  of  output  will  not  reduce  the  expense 
of  operation  by  a  corresponding  ratio.  A  considerable 
part  of  the  expense  results  from  keeping  the  plant  ready- 
to  serve  the  largest  demand  that  it  is  possible  to  make 
upon  it  at  any  time.  In  the  mind  of  the  Commission  the 
primary  consideration  is  so  to  distribute  the  various  items 
of  cost  that  each  branch  of  the  service,  and  each  customer 
and  class  of  customers,  will  bear  their  just  burden  of  the 
total  costs.1 

Because  a  relatively  small  proportion  of  the  water 
pumped  is  used  for  fire  protection,  it  follows  that  but  a 
small  proportion  of  the  expense  which  varies  with  the 
amount  of  water  pumped  should  be  borne  by  the  fire  pro- 
tection service.  From  an  analysis  of  a  number  of  water 
plants,  Commissioner  Erickson  declares  that  only  from  1 
to  2  per  cent  of  the  total  amount  of  water  pumped  is  used 
for  fire  service.    Recently  the  Commission  held : 2 

The  determination  of  the  proper  charge  to  the  public  for  fire 
service  rests  largely  upon  the  matter  of  investment.  The  amount 
of  water  used  has  practically  no  effect  on  the  final  result,  as  the 
quantity  consumed  for  fire  service  is  practically  negligible. 

Likewise  the  share  of  consumer  expense  applicable  to 
fire  service  is  small,  as  it  consists  of  little  more  than  the 
looking  after  the  hydrants.  Fire  service  charges  are  made 
up  largely  of  fixed  charges  and  standby  expenses,  incident 
to  the  large  demands  it  may  make  on  the  system  at  any 
time.  The  amount  of  capacity  expense  that  is  charged 
against  any  consumer  "is  the  price3  that  in  justice 
he  should  pay  for  the  right  of  demanding  service  from 

1  DicJc  et  al.  v.  Madison  Water  Commission,  5  W.  E.  C.  R.,  757, 
803. 

2  City  of  Beloit  v.  Beloit  W.  G.  $•  El.  Co.,  1911,  7  W.  R.  C.  R., 
336,  841. 

sDick,  etc.,  op.  cit.,  757,  803. 


148     RAILROADS  AND  PUBLIC  UTILITIES 

the  utility,  however  great  or  small  that  service  may 
be." 

The  next  step  in  the  separation  of  the  cost  of  fire  pro- 
tection from  that  of  general  service  is  the  segregation  of 
the  operating  expenses  between  capacity,  output  and  con- 
sumer charges  based  on  the  elements  that  influence  each 
item.  Generally  speaking,  the  Commission  has  found  that 
in  the  average  typical  plant  the  capacity  expense  would 
amount  to  about  38  per  cent,  the  consumer  expense  to  18 
per  cent  and  the  output  expense  to  about  44  per  cent  of  the 
total  operating  charges.1 

For  the  output  expenses  the  accepted  basis  of  appor- 
tionment is  the  actual  consumption  of  water  for  munici- 
pal and  private  purposes.2  The  capacity  cost  is  divided 
between  the  two  branches  of  service^  on  the  basis  of  the  pro- 
portion of  the  investment  required  to  meet  the  demands 
for  service.3 

For  example,  in  a  typical  water  plant  the  fire  demand 
may  be  1,200  gallons  per  minute  while  the  demand  for  in- 
dustrial and  domestic  service  may  reach  1,000  gallons 
per  minute.  On  the  basis  of  these  demands  54.5  per  cent 
of  the  capacity  part  of  the  operating  expense  should  be 
apportioned  to  fire  and  45.5  per  cent  to  general  service. 

Consumer  expenses  are  allotted  generally  on  the  basis 
of  the  number  of  consumers.  The  taxes,  depreciation  and 
interest  are  apportioned  among  the  amounts  invested  in 
each  separate  division  of  the  property.4 

"With  the  cost  of  the  service  ascertained,  with  the  allo- 
cation of  this  expense  between  capacity,  output  and  con- 
sumer's costs,  and  with  the  apportionment  of  these  three 

1  Eriekson,  Address  on  water  rates,  p.  11. 

"In  re  Application  Jefferson  Municipal  El.  Lt.  4"  W.  Plant,  1910, 

5  W.  E.  C.  E.,  578,  804;  Kirwin  et  al.  v.  City  of  Darlington,  1910, 

6  W.  E.  C.  E.,  36,  781. 

8  City  of  Eipon  v.  Bipon  Lt.  $  W.  Co.,  1910,  5  W.  E.  C.  E.,  62,  804. 
4  Fitzgerald  et  al.  v.  Tomahawk,  1911,  8  W.  E.  C.  E.,  47,  762. 


MAKING  OF  UTILITY  RATES  149 

classes  of  expense  between  the  two  branches  of  service,  the 
task  remains  of  distributing  the  capacity,  output  and  con- 
sumers' costs  over  the  private  water  users  so  that  each  will 
pay  his  just  share  toward  the  total  revenues  necessary  to 
operate  the  utility. 

Where  the  city  is  the  purchaser  the  formation  of  sched- 
ules is  comparatively  simple.  The  conclusion  reached  by 
the  Commission  in  numerous  decisions  is  that  the  cost  of 
fire  service  should  be  treated  as  a  whole,  regardless  of  the 
number  of  hydrants  or  miles  of  mains;  that  it  should  be 
charged  to  the  municipality  in  a  lump  sum  and  that  the 
cost  of  new  extensions  should  be  covered  by  separate 
charges.1 

Domestic  and  industrial  water  rates  are  more  compli- 
cated in  the  making.  It  necessitates  complete  consumer 
and  demand  data  from  the  records  of  the  plant  with  a  cor- 
rect distribution  of  the  capacity  and  consumer  cost  upon 
the  amount  of  water  sold.  These  unit  costs  must  be  modi- 
fied in  the  light  of  local  conditions.  Under  the  rulings  of 
the  Commission  capacity  cost  must  be  borne  by  each  con- 
sumer in  proportion  to  his  demand  upon  the  plant,  or  the 
investment  and  other  demand  costs  his  demand  represents. 
A  consumer  with  a  three-inch  pipe  may  use  no  more  water 
than  one  with  a  one-inch  pipe,  but  he  makes  a  correspond- 
ingly larger  demand  upon  the  plant.2  Capacity  and  con- 
sumer expenses  are  in  the  nature  of  fixed  charges,  which 
continue  whether  the  customer  uses  little  or  no  water.  In 
some  rate  schedules  they  appear  as  service  or  demand 
charges;  in  other  schedules  they  are  covered  by  the  mini- 
mum bill. 

It  only  remains  to  provide  a  charge  that  will  cover  the 
actual  output  cost.  A  meter  charge  is  arrived  at  by  divid- 
ing the  total  output  expense  with  the  number  of  units  of 

1  Marinette  v.  City  W.  Co.,  1911,  8  W.  E.  C.  E.,  366,  385,  825. 

2  Dick  et  al.,  op.  cit.,  765,  837. 


150     RAILROADS  AND  PUBLIC  UTILITIES 

water  sold.  "When  it  is  impracticable  to  cover  the  entire 
demand  cost  in  a  separate  charge  it  is  often  necessary  to 
include  at  least  a  part  of  it  in  the  output  charge. 

These  reasonings  suggest  a  schedule  for  water  service 
furnished  to  domestic  and  industrial  users  that  is  composed 
of  a  service  charge  covering  the  capacity  and  consumer 
expenses,  plus  a  meter  charge  based  on  the  number  of  thou- 
sand gallons  of  water  used.  It  is  a  rule  followed  by  the 
Commission  in  most  cases  to  adopt  meter  charges  that  de- 
crease in  amount  with  each  successive  increase  in  the 
amount  of  water  used.  This  graduation  is  ordinarily 
known  as  the  cost  method  of  rate-making,  where  each  con- 
sumer pays,  as  nearly  as  practicable,  the  cost  of  the  service 
he  obtains.  It  requires  laborious  and  tedious  processes  of 
calculations  to  arrive  at  the  results.  Fairness  to  the  con- 
sumers would  seem  to  justify  the  labor. 

In  order  to  better  illustrate  the  method  of  rate-making, 
Commissioner  Erickson  recently  made  an  analysis  of  a 
typical  municipally  owned  water  company.  Using  the 
methods  of  apportionment  already  explained,  Mr.  Erickson 
said: 

The  cost  of  this  plant  and  its  business  was  about  $150,000. 
On  this  amount  the  taxes,  depreciation  and  interest  charges  at  6 
per  cent  amounted  to  $9,000  annually.  The  operating  expenses 
proper  footed  up  to  about  $11,586.60  for  the  year. 

Of  the  fixed  charges  of  $9,000  the  fire  service  was  allotted 
$4,S00  or  60  per  cent  and  the  general  service  $4,200  or  40  per 
cent. 

Of  the  operating  expenses  of  $11,586.60,  the  capacity  cost 
amounted  to  $4,374.13  or  37.75  per  cent;  the  output  cost  to 
$5,153.35  or  44.48  per  cent  and  the  consumer  cost  to  $2,059.12 
or  17.77  per  cent. 

When  of  this  demand  cost  in  the  operating  expenses  54.5  per 
cent  is  allotted  to  the  fire  service  and  45.5  per  cent  to  the  general 
service;  when  the  output  cost  is  divided  on  the  basis  of  2  per  cent 


MAKING  OF  UTILITY  RATES 


151 


for  the  fire  and  98  per  cent  for  the  general  service;  and  when 
the  fire  service  is  made  to  bear  about  5  per  cent  of  the  con- 
sumer cost  and  the  balance  thereof  goes  to  the  general  service  the 
results  are  about  as  follows: 


Capacity.. 
Output . . . 
Consumer . 

Totals 


Fire 


$2,383.90 

103.07 

9.77 


$2,496.74 


General 


$1,990.23 
5,050.28 
2,049.35 


$9,089.86 


When  the  $2,496.74  for  operating  expenses  of  the  fire  service 
are  increased  by  the  $4,800  which  this  service  is  made  to  bear 
for  the  fixed  charges  the  total  annual  cost  of  the  fire  service  is 
$7,296.74. 

When  the  operating  expenses  of  $9,089.86,  as  above  appor- 
tioned, are  increased  by  $4,200  for  fixed  charges,  or  for  taxes, 
depreciation  and  interest,  and  when  these  fixed  charges  are  allot- 
ted to  the  capacity,  output  and  consumer  cost  on  the  same  basis 
as  the  operating  expenses,  the  total  cost  of  each  of  these  classes 
and  for  the  general  service  as  a  whole  is  as  follows: 

For  General  Service  Only 


Capacity $3,576 .  99 

Output 6,919.70 

Consumer 2,793. 17 

Total $13,289.86 


When  for  general  service  the  consumer  cost  of  $2,793.17  is 
distributed  among  the  1,200  consumers  of  the  plant  the  average 
for  each  is  $2.33.  When  the  output  cost  of  $6,919.70  is  dis- 
tributed on  the  150,000,000  gallons  of  water  sold,  the  average  cost 
per  1,000  gallons  is  about  4.61  cents.  The  number  of  meters  and 
services  used  and  their  sizes  were  as  follows: 


152     RAILROADS  AND  PUBLIC  UTILITIES 


Size  in  inches 

Meters 

«/s 

1,100 

y* 

50 

1 

20 

2 

15 

3 

10 

4 

5 

Total....... 

1,200 

The  following  table  shows  the  consumer  charge  per  consumer, 
the  capacity  charge  for  each  of  the  various  sizes  of  meters  and 
services  and  the  total  for  both.  This  total  in  rate-making  is  often 
included  in  one  charge  which  is  named  "service  charge."  The 
table  also  shows  the  total  revenue  for  the  year  that  would  be 
derived  from  such  "service  charges."  It  will  be  noted  that  the 
total  amounts  to  $5,900  or  to  $470.16  less  than  the  sum  of  the 
capacity  and  the  consumer  costs  given  above  which  amount  to 
$6,369.16,  or  to  $3,576.99  for  the  former  and  to  $2,993.17  for 
the  latter.  This  difference  arose  mostly  from  the  fact  that  round 
figures  were  used  in  computing  the  capacity  charges  for  each  class 
of  meters.  This  balance  of  $470.16  can  easily  be  cared  for  by  a 
readjustment  of  the  figures  or  by  including  it  in  the  output  cost 
which  is  the  basis  for  the  meter  charge. 

Total  Service  Charges  Per  Year 


Size  of  meter 

Total 
service 
charge 

Con- 
sumer 
charge 

Capac- 
ity 
charge 

Number 

of 
meters 

Total 

revenue 

from 

service 

charge 

$4.00 
6.00 
10.00 
20.00 
40.00 
60.00 

$2.33 
2.33 
2.33 
2.33 
2.33 
2.33 

$1.69 
3.69 
7.67 
17.67 
37.67 
57.67 

1,100 
50 
20 
15 
10 
5 

$4,400 

%  inch 

300 

1  inch 

200 

2  inch 

300 

3  inch 

400 

4  inch 

300 

Total 

$5,900 

MAKING  OF  UTILITY  RATES  153 

When  the  demand  costs  are  assigned  to  the  meters  and  services 
somewhat  in  proportion  to  their  size  it  is  thus  found  that  the 
cost  per  meter  or  service  will  also  vary  with  the  size  of  the 
same. 

These  figures  suggest  a  rate  schedule  for  the  general  service 
in  which  the  service  charge  per  quarter  ranges  from  $1  for 
the  %-inch  meters  to  $15  for  the  4-inch  meter  plus  a  meter 
charge  of  six  cents  per  1,000  gallons  of  water  for  the  first  40,000 
gallons  and  about  4.5  cents  per  1,000  gallons  for  all  consumption 
in  excess  of  this.  This  schedule  on  the  basis  of  the  conditions 
given  would  yield  a  trifle  more  revenue  than  the  cost  for  the 
general  service  given  above,  which  was  about  $13,289.86. 

These  figures  and  facts  suggest  further  that  the  cost  of  fire 
protection  service  is  represented  by  $2,496.74  for  operating  ex- 
penses and  by  $4,800  for  taxes,  depreciation  and  interest  and 
that  the  sum  of  these  items,  which  is  $7,296.74,  should  be  to  the 
city  as  the  annual  charge  for  such  protection. 

MAKING   ELECTEIC   AND    GAS    BATES 

Practically  the  same  principles  in  the  division  of  fixed 
and  variable  expenses,  and  the  classification  of  items  of 
cost,  are  used  by  the  Commission  in  making  rates  for  the 
sale  of  gas  and  electricity.1  Numerous  decisions  by  the 
Commission  show  that  the  fixed  expenses  in  these  plants  are 
high.  The  plant  investment  is  usually  several  times  greater 
than  the  annual  gross  earnings.  Electricity  and  gas  can- 
not be  stored  for  long  periods  and  sold  as  are  manufactured 
goods.  Both  gas  and  water  must  be  kept  under  heavy  pres- 
sure at  all  times,  entailing  gerat  expense. 

To  furnish  adequate  service  an  electric  lighting  enter- 
prise must  be  able  to  furnish  a  complete  demand  instanta- 
neously. Obviously  this  renders  the  cost  per  unit  higher 
than  if  there  were  a  constant  demand.  In  other  words, 
this  demand  that  may  be  made  upon  the  plant  at  any  time 

1  City  of  Bipon  v.  Bipon  Lt.  &  W.  Co.,  1910,  5  W.  E.  C.  E.,  56,  875. 


154     RAILROADS  AND  PUBLIC  UTILITIES 

fixes  the  amount  of  investment  necessary  to  continue  the 
enterprise  consistent  with  good  service. 

The  cost  of  supplying  gas  and  electricity,  as  pointed 
out  in  the  analysis  of  water  plants,  is  divided  between 
fixed  and  variable  expenses.1  The  former  depends  upon 
the  capacity  or  maximum  demand  and  the  latter  on  the 
amount  of  output.2  The  relation  of  these  expenses  to  each 
other  depends  much  upon  the  management  of  the  plant 
and  local  conditions. 

The  rates  fixed  by  the  Commission  are  ascertained  by 
computing  a  fixed  charge  based  upon  the  consumer's  de- 
mand and  a  variable  charge  per  unit  of  electricity  used. 
A  typical  illustration  of  the  method  employed  is  contained 
in  some  of  the  literature  sent  out  by  the  Commission: 

Assume  a  plant  that  has  a  capacity  of  300  kilowatts ;  that  has 
an  average  daily  use  of  current  of  about  five  hours;  that  has  an 
operating  expense,  including  taxes  and  interest  on  the  invest- 
ment, to  the  amount  of  about  $18,000  for  the  year,  of  which 
about  two-thirds  is  covered  by  the  fixed,  and  about  one-third  by 
the  variable  expenses,  and  that  has  a  connected  load  and  an  in- 
stantaneous maximum  demand  that  about  equals  the  capacity 
of  the  plant.  This  is  a  situation  that  is  probably  not  often,  if 
ever  found  in  actual  practice,  but  it  is  assumed  here  for  the 
sake  of  simplicity  or  convenience  in  figuring.  These  figures,  to- 
gether with  the  annual  output  of  current  as  below  given,  fur- 
nish the  material  by  which  the  principles  laid  down  in  the  pre- 
ceding pages  may  be  illustrated.  It  should  also  be  noted  that  in 
actual  experience  it  is  found  that  the  proportion  of  the  fixed 
expenses  is  apt  to  vary  greatly  with  the  conditions,  and  that 

1  Leading  cases  followed  in  apportionment  of  electric  expenses: 
In  re  Application  Stoughton  Hun.  El.  Lt.  System,  1909,  3  W.  E.  C. 
E.,  490;  In  re  Menominee  $  Marinette  Lt.  $  Tr.  Co.,  1909,  3  W.  E. 
C.  E.,  831.  Gas  Utility  Apportionment:  State  Journal  Printing  Co. 
et  al.  v.  Madison  Gas  $  Elec.  Co.  4  W.  E.  C.  E.,  735,  737;  City  of 
Sacine  v.  Bacine  G.  Lt.  Co.,  6  W.  E.  C.  E.,  304,  309. 

2  City  of  Whitewater  v.  Whitewater  El.  Lt.  Co.,  1910,  6  W.  E.  C. 
E.,  141. 


MAKING  OF  UTILITY  RATES  155 

all  of  the  main  classes  of  expenses,  including  both  interest  and 
depreciation,  are  in  most  cases  likely  to  include  both  fixed  and 
variable  items. 

The  annual  output  of  current  for  this  plant  is  as  follows: 

1-hr.  operation  daily 109,500  kw.  hrs. 

2-hr.  operation  daily 219,000  kw.  hrs. 

3-hr.  operation  daily 328,500  kw.  hrs. 

5-hr.  operation  daily 547,500  kw.  hrs. 

10-hr.  operation  daily 1,095,000  kw.  hrs. 

24-hr.  operation  daily 2,628,000  kw.  hrs. 

The  fixed  expenses  on  the  basis  stated  amount  to  about 
$12,000  for  the  year,  or  to  $40  per  kilowatt  per  year.  This  ex- 
pense remains  the  same  whether  the  plant  is  operated  one,  two  or 
three  hours  daily,  or  even  if  it  is  in  operation  all  day. 

As  the  total  fixed  expense  remains  the  same,  regardless  of 
output,  and  as  the  output  in  kilowatt  hours  increases  with  in- 
crease in  the  number  of  hours  of  daily  operation,  it  must  also 
follow  that  the  fixed  cost  per  kilowatt  hour  decreases  with  in- 
creases in  the  output. 

The  fixed  cost  per  kilowatt  hour  for  instance  is : 


11.00  cts.  when  the  plant  is  in  operation  1  hour  daily 
5 .  50  cts.  when  the  plant  is  in  operation  2  hours  daily 
3 . 66  cts.  when  the  plant  is  in  operation  3  hours  daily 
2.20  cts.  when  the  plant  is  in  operation  5  hours  daily 


The  variable  expense  of  this  plant  is : 


$3,000  when  the  plant  is  in  operation  1  hour  daily 
6,000  when  the  plant  is  in  operation  2  hours  daily 
9,000  when  the  plant  is  in  operation  3  hours  daily 

15,000  when  the  plant  is  in  operation  5  hours  daily 


In  other  words,  the  variable  expenses  are  increasing  with  in- 
creases in  the  output  and  not  far  from  in  the  same  proportion. 

Since  the  total  variable  expenses  thus  vary  with  the  output,  or 
with  the  hours  of  daily  use  of  current,  it  must  also  follow 
that  the  variable  expense  per  kilowatt  hour  is  about  the  same 


Fixed 

11.00 

plus 

5.50 

plus 

3.66 

plus 

2.20 

plus 

156     RAILROADS  AND  PUBLIC  UTILITIES 

when  the  plant  is  used  one  hour  each  day  as  when  used  three 
or  more  hours  daily.  In  the  plant  in  question  here  the  variable 
expense  per  kilowatt  hour  amounts  to  about  2.77  cents. 

The  total  cost  of  current,  as  stated,  is  thus  made  up  of  a  fixed 
and  a  variable  expense.  When  the  fixed  and  variable  costs  are 
thus  added  together,  it  is  found  that  the  totals  of  both  per  kilo- 
watt hour  are: 


Variable   Total 
2 .  77     13 .  77  cts.  when  plant  is  in  oper.  1  hr.  daily 
2.77       8.27  cts.  when  plant  is  in  oper.  2  hrs. daily 
2 .  77       6 .  43  cts.  when  plant  is  in  oper.  3  hrs.  daily 
2.77       4.97  cts.  when  plant  is  in  oper.  5  hrs.  daily 


Nothing  illustrates  better  the  fallacy  of  flat  rates  or 
the  uniform  rates  per  lamp,  or  per  kilowatt  hour,  than  the 
above  table.1  It  shows  that  rates  designed,  without  regard 
to  installation  and  maximum  demand  of  the  consumers, 
must  be  discriminatory  and  inequitable.  "A  man  having 
an  installation  and  demand  of  two  kilowatts,  and  using 
his  current  only  one  hour  per  day,  consumes  no  more  cur- 
rent than  the  man  who  has  an  installation  and  demand 
of  one  kilowatt,  but  who  is  using  his  current  two  hours 
daily,2  yet  the  investment  for  the  former  must  be  twice  as 
great  as  that  for  the  latter.  Under  these  circumstances  it 
is  manifestly  clear  that  the  same  rate  per  kilowatt  hour 
for  both  cannot  be  a  just  or  fair  rate."  As  disclosed  by 
the  above  unit  cost  table  the  cost  per  kilowatt  hour  for  the 
first  consumer  is  13.77  cents  and  for  the  second  8.27  cents 
per  kilowatt  hour. 

A  glance  at  the  tables  showing  the  method  of  cost  of 
service  rate-making  illustrates  how  rapidly  the  costs  de- 
cline with  an  increase  of  business.  Nearly  two-thirds  of 
the  total  expenses  of  the  service,  including  fixed  charges, 

1  City  of  Eipon  v.  Sipon  Lt.  <f  W.  Co.,  1910,  5  W.  E.  C.  E.,  34,  864. 

2  In  re  Application  Menominee  tj-  Marinette  Lt.  and  Tr.  Co.,  1909, 
3  W.  E.  C.  E.,  830. 


MAKING  OF  UTILITY  RATES  157 

are  independent  of  the  amount  of  current  generated  and 
sold.  It  follows  that  the  larger  the  output  up  to  the  point 
where  the  full  capacity  of  the  plant  is  utilized  the  better 
is  the  load  factor  and  the  lower  the  cost  per  unit  of  current 
will  be. 

A  rate  schedule  based  on  this  cost  of  service  principle 
results  in  higher  average  rates  per  kilowatt  hour  for  the 
short-  than  for  long-hour  users.  Residences  are  usually 
short-hour  users  and  power  customers  are  usually  long- 
hour  users.  Numerous  decisions  worked  out  on  this  cost- 
basis  principle,  show  the  wide  difference  in  rates  possible 
under  this  plan,  that  cannot  be  considered  as  unjustly  dis- 
criminatory, as  between  long-  and  short-hour  consumers. 

For  example,  a  recent  decision  showed  the  average  cost 
per  kilowatt  hour  for  lighting  rates  was  6.2  cents,  street 
lighting  5.2  cents,  power  4.2  cents,  and  traction  service 
1.9  cents.  Lower  rates  for  large  power  users  increase  the 
output  and  spread  the  high  fixed  expenses  over  a  large 
field,  reducing  unit  rates  for  all  classes  proportionately. 

"A  high  load  factor  stands  for  low  costs,"  said  Com- 
missioner Erickson  recently,1  "but  a  satisfactory  load  can- 
not often  be  obtained  without  rate  schedules  that  for  each 
branch  and  class  of  service  are  as  closely  adjusted  to  the 
cost  as  is  practicable  under  the  circumstances.  In  the 
operation  and  management  of  a  public  utility,  there  is  no 
feature  that  is  of  greater  importance,  either  to  the 
utility  or  its  customers,  than  a  properly  adjusted  rate 
schedule." 

This  task  of  making  the  so-called  cost  of  service  rates 
requires  an  analysis  of  the  most  complete  and  detailed  cost 
figures  obtainable  under  the  method  of  uniform  account- 
ing. These  data  are  obtained  under  the  classification  of  ac- 
counts discussed  in  an  earlier  chapter.     Such  an  analysis, 

1  Article  on  "Electric  Eate  Making."     Annals  of  the  American 
Academy  of  Political  and  Social  Science,  May,  1914, 


158     RAILROADS  AND  PUBLIC  UTILITIES 

when  the  items  of  expense  are  properly  allocated  over  the 
different  departments  of  service  and  classes  of  customers, 
results  in  placing  all  users  on  an  equitable  footing,  and 
forces  the  plants  on  a  sounder  business  basis.1 

1  The  relationship  of  the  cost  of  service  principle  to  rate-inaking 
will  be  discussed  more  fully  in  Chapter  xii. 


CHAPTER   XI 

STEEET   AND    INTEBUEBAN   EAILWATS 

Although  experimentation  began  in  1835,  both  in  this 
country  and  in  Europe,  the  electric  railway  did  not  become 
a  commercial  possibility  until  about  1888.  The  early  ur- 
ban railway  transportation  was  furnished  by  animal,  cable 
and  steam  power.  When  the  first  United  States  census 
was  taken  of  the  industry  in  1890  it  was  found  that  in 
th3  neighborhood  of  69  per  cent  of  the  total  street  railway 
mileage  and  60  per  cent  of  the  passenger  traffic  were  still 
conducted  by  horse  or  mule  traction  systems.  The  electric 
railways  at  that  time  carried  only  7  per  cent  of  the  pas- 
sengers and  operated  16  per  cent  of  the  track  mileage. 
The  growth  of  this  method  of  transportation  has  been 
phenomenal.  Since  1890  the  trackage  increased  from  1,262 
miles  to  41,022  in  1912 — a  thirty-two-fold  increase  within 
twenty-two  years — and  it  has  now  almost  entirely  super- 
seded all  animal  and  cable  systems  and  steam  railways. 
The  percentages  and  figures  given  also  include  the  devel- 
opment of  interurbans  since  1894,  when  they  became  suc- 
cessful through  the  economical  transmission  of  electricity 
over  comparatively  long  distances.  The  real  expansion  of 
interurbans,  however,  began  somewhat  later  than  1894. 

Going  back  one  finds  that  in  1886,  according  to  the  cen- 
sus, only  two  electric  railways  operated  in  this  entire  coun- 
try. About  that  time  a  system  was  installed  in  Appleton, 
Wisconsin.  It  was  undoubtedly  one  of  the  pioneers,  for  its 
charter  bears  the  date,  January  1,  1886,  and  in  1890  it  was 

159 


160     RAILROADS  AND  PUBLIC  UTDLITIES 

reported  as  having  3.5  miles  of  track  in  operation.  Soon 
afterwards  there  were  four  other  electric  railways  in  "Wis- 
consin. One  operated  in  Eau  Claire,  another  in  Superior 
and  two  in  Milwaukee.  The  total  trackage  of  these  rail- 
ways was  45.5  miles.  Besides  these  were  nine  animal  power 
systems  and  one  steam  power.  To  show  the  condition  of 
street  railway  transportation  it  may  be  stated  that  in  the 
city  of  Milwaukee,  for  instance,  five  separate  systems  oper- 
ated in  1890 :  two  electric  systems,  two  animal  systems  and 
one  steam  dummy  line. 

Twelve  years  later  in  1902  twenty  systems  with  ap- 
proximately 446  miles  of  electric  railway  track  were  in 
operation  in  Wisconsin — a  tenfold  increase.  By  1907 
there  were  twenty-five  systems  with  659.6  miles  of  track 
according  to  the  Wisconsin  Commission's  first  annual  re- 
port. All  other  forms  of  urban  transportation  had  entirely 
disappeared.  There  is  no  doubt  that  the  rapid  development 
of  the  electric  railway  up  to  this  period  has  not  only  been 
caused  by  its  superior  commercial  possibilities  over  other 
systems,  but  has  also  been  caused  by  the  exceedingly  rapid 
growth  of  population  within  the  cities.  Especially  is  this 
true  when  it  is  considered  that  cities  usually  grow  to  a 
certain  size  without  any  real  need  of  local  transportation. 
This  size  may  be  fixed  between  5,000  and  10,000  inhabi- 
tants, depending  upon  physical  and  social  conditions.  But 
at  this  point  and  beyond,  municipal  intercourse  demands 
more  rapid  transportation  and  the  field  is  open  for  urban 
railway  construction.  During  the  last  few  decades  many 
Wisconsin  cities  have  reached  this  stage  or  exceeded  it,  and 
the  commercial  success  of  the  electric  railway  fills  a  much 
needed  want.  The  period  since  1907  merits  a  more  detailed 
discussion  than  that  accorded  to  previous  periods,  but  be- 
fore giving  these  details  it  will  be  well  to  include  first  a 
brief  review  of  the  beginning  of  regulation. 

Under  the  act  of  1905  establishing  the  Commission,  jur- 


STREET  AND  INTERURBAN  RAILWAYS  161 

isdiction  was  given  over  common  carriers.  This  law,  how- 
ever, did  not,  as  later  interpreted,  result  in  uniform  control 
over  electric  railways.1  In  an  early  case  the  fact  was  es- 
tablished that  jurisdiction  extended  only  over  those  elec- 
tric railways  whose  lines  extended  beyond  the  corporate 
limits  of  cities,  leaving  those  wholly  within  these  limits,  so- 
called  street  or  urban  railways,  entirely  exempt  from  regu- 
lation. In  the  annual  report  of  the  Commission  dated  De- 
cember 1,  1906,  attention  was  called  to  the  construction 
placed  unon  the  law  in  this  respect  by  the  attorney-general 
and  by  the  Commission,  and  the  suggestion  was  made  that 
power  to  regulate  should  embrace  either  all  urban  railways 
or  that  such  power  should  not  extend  to  any  urban  sys- 
tems. With  this  inconsistency  before  it  the  legislature 
of  1907,  at  the  regular  session,  amended  the  section  defin- 
ing "railroad"  to  include  street  and  interurban  rail- 
ways.2 From  this  time,  then,  1907,  effective  regulation 
began. 

One  of  the  first  important  acts  the  Commission  under- 
took was  the  promulgation  of  a  uniform  system  of  account- 
ing. The  text  issued  July  1,  1909,  conformed  quite  closely 
to  that  prescribed  by  the  Interstate  Commerce  Commission. 
Special  effort  was  made  to  secure  similarity  wherever  pos- 
sible, but  in  a  number  of  instances  it  was  found  that 
changes  were  necessary.  Greater  detail  and  differences  in 
the  power  accounts  were  required  to  facilitate  cost  analy- 
sis in  rate  and  service  cases.  The  power  accounts  were  so 
arranged  as  to  produce  uniformity  for  all  joint  utility  op- 
eration, thus  avoiding  unnecessary  accounts  and  entries 
on  the  part  of  the  utilities.  In  the  preparation  of  the 
classifications,  conferences  were  had  with  the  accounting 
committee  of  the  Wisconsin  Street  and  Interurban  Railway 

1In  re  Application   of   Chapter   362,   Laws  of   1905,   to   Certain 
Street  Eailways,   1906,  1  W.  E.  C.  E.,   178. 
2  Sec.   1797-2,  Wisconsin  Statutes,   1913. 


162     RAILROADS  AND  PUBLIC  UTILITIES 

Association  and  with  officers  of  the  association  and  of  in- 
dividual railway  systems. 

Due  to  the  differences  in  operating  conditions,  however, 
experience  up  to  1912  indicated  that  certain  accounts  should 
be  separated  as  to  urban,  suburban  and  interurban  opera- 
tions whenever  one  company  conducted  any  combination  of 
these  three  services.  Accurate  accounts  and  source  data 
could  not  be  obtained  otherwise.  Accordingly,  a  supple- 
mentary report  to  produce  these  separations  was  issued 
for  the  fiscal  year  ending  June  30,  1913,  and  this  supple- 
ment was  made  a  permanent  part  of  the  report  for  1914. 
On  the  whole,  returns  have  been  satisfactory,  each  year 
showing  greater  improvements  over  its  predecessor.  Nev- 
ertheless there  is  still  room  for  betterment,  especially  in 
reporting  primary  account  separations,  traffic  statistics, 
units  of  operation,  and  detailed  construction  charges.  To 
this  end  all  possible  assistance  has  been  rendered  through 
members  of  the  statistical  staff. 

The  problems  coming  before  the  Commission  to  regulate 
service  are  complicated  and  technical.  To  meet  the  extreme 
demands  for  transportation  during  the  morning  and  even- 
ing rush  hours  in  urban  operation  requires  patient  and  de- 
tailed study  of  traffic  data  and  routing.  The  public  often 
does  not  realize  how  much  time  is  required  in  certain  cases 
to  find  the  solution  most  equitable  to  all  parties  concerned. 
Service  must  be  adequate  for  patrons  and  still  within  the 
reasonable  limits  of  the  company's  financial  ability.  The 
standard  set  must  usually  be  so  flexible  as  to  meet  the 
requirements  of  rush  and  non-rush  periods,  of  joint  urban, 
suburban  and  interurban  service,  of  weekly  and  seasonal 
variations  in  demand.  In  interurban  service  a  mooted 
question  is  the  extra  service  required  during  the  summer 
months.  Pleasure  resorts  along  a  line  cause  considerable 
congestion  of  lines,  especially  on  Saturdays,  Sundays  and 
holidays.    The  running  of  limited  and  local  service  over  the 


STREET  AND  INTERURBAN  RAILWAYS   163 

same  interurban  line  invariably  raises  the  question  of  ade- 
quacy of  local  service  and  the  limitation  of  scheduled  inter- 
urban stops.  These  and  similar  situations  are  matters  re- 
quiring extensive  investigation.  In  order  to  give  testimony 
of  the  Commission's  work  in  the  matter  of  service,  the  fol- 
lowing general  account  of  cases  is  submitted,  indicating  the 
amount  and  variety  of  decisions  rendered. 

Schedules. — In  this  matter  a  large  improvement  has  re- 
sulted from  the  orders  of  the  Commission  on  the  lines  of 
various  companies  by  providing  more  rapid  and  adequate 
service  through  frequency  of  cars  and  adjusting  the  car 
traffic  to  the  variations  in  the  passenger  traffic.  Route  and 
destination  signs  on  cars  have  been  found  faulty  and  cor- 
rected— to  the  great  convenience  of  the  public.  In  one 
case  a  company  had  refused  to  operate  its  cars  after  11 :30 
P.  M.,  thus  inconveniencing  a  large  number  of  patrons 
who  remained  at  social  or  other  functions  until  12  o'clock. 
Service  was  provided  by  the  Commission  until  12  -.20  from 
the  central  part  of  the  city  without  increasing  the  expense 
of  the  company  very  materially.  One  of  the  problems 
which  has  occupied  a  great  deal  of  time  and  skill  recently 
was  the  work  required  to  determine  a  proper  standard 
of  car  loading  as  a  regulator  of  schedules  under  nearly 
all  ordinary  conditions  of  traffic. 

Crossings. — Over  one  thousand  highway  crossings  exist 
in  this  state  in  conjunction  with  electric  railways,  of  which 
about  fifty  are  protected  at  present.  Within  the  last  two 
years  upwards  of  twenty  decisions  have  been  rendered 
ordering  the  protection  of  electric  railway  crossings  with 
steam  roads  and  highways.  In  some  cases  two  or  more 
highway  intersections  were  affected  in  one  order.  Among 
the  methods  ordered  for  protecting  the  public  at  these 
crossings  may  be  mentioned  the  automatic  bell  and  illu- 
minated sign  for  night  indication,  separation  of  grades, 
removing  obstructions  to  the  view,  such  as  trees,  banks  of 


164.     RAILROADS  AND  PUBLIC  UTILITIES 

earth,  wood  wing  fences  to  be  replaced  by  wire  fences, 
grading  of  approaches,  removing  entirely  grade  intersec- 
tions with  sharp  or  acute  angles  and  replacing  them,  if  pos- 
sible, by  right-angled  intersections.  The  ordering  of  safety 
appliances  at  steam  crossings,  where  street  or  interurban 
railways  operate,  has  added  considerably  to  the  safety  of 
service  of  these  electric  roads. 

Interlocking  Plants. — On  October  8,  1913,  the  Commis- 
sion adopted  rules  governing  the  construction,  maintenance 
and  operation  of  interlocking  plants.  By  these  rules  a 
practical  unification  of  signals  has  been  obtained  with  Illi- 
nois, Minnesota  and  Indiana.  The  requirements  are  that 
plans  for  construction,  reconstruction  and  rehabilitation 
must  be  submitted  to  the  Commission  for  approval.  The 
semaphore  type  of  signal  has  been  adopted  as  a  general 
standard.  No  interlocking  plant  is  to  be  removed  without 
notification.  Interlocking  report  blanks  are  required 
monthly  and  quarterly  showing  the  condition  of  the  entire 
plant,  tests  made,  what  failures  have  occurred  in  any  ap- 
paratus during  the  period  and  the  attendant  causes,  and 
how  many  derailments  have  taken  place. 

Cars. — On  four  electric  lines  the  Commission  has  regu- 
lated the  adequacy  of  car  service  as  regards  heating,  ven- 
tilation, loading,  size,  front  and  rear  exits,  general  main- 
tenance, cleaning,  and  brake  operation. 

Stops. — In  a  half-dozen  decisions  relief  has  been  granted 
to  electric  railway  patrons  by  ordering  companies  to  stop 
their  cars  at  places  where  they  either  refused  to  do  so  or 
had  abandoned  former  stops. 

Stations. — Improvements  were  ordered  in  two  stations 
to  afford  better  accommodations  to  the  public. 

Bridges. — A  statute  of  1911  gives  the  Commission 
authority  over  the  maintenance,  renewals  and  construction 
of  bridges  used  jointly  for  highway  and  electric  railway 
purposes.    Detailed  and  careful  investigations  of  the  causes 


STREET  AND  INTERURBAN  RAILWAYS    165 

of  bridge  accidents  have  been  undertaken  to  determine 
structural  or  operating  defects.  To  prevent  corrosion, 
cleaning  and  painting  methods  have  been  extensively  in- 
vestigated and  advice  is  given  to  local  officials,  city  en- 
gineers and  others  who  have  in  many  instances  requested 
assistance.  Pavements  upon  bridges  have  also  received 
attention  in  order  that  aid  can  be  given  when  necessary. 
In  a  recent  decision  under  this  statute  a  company  was 
required  to  replace  a  dangerous  bridge  by  a  new  struc- 
ture and  the  cost  was  assessed  to  the  municipality  and 
street  railway  company  in  proper  proportions.1  Thus  was 
a  long-standing  municipal  controversy  closed. 

Track  Extension  and  Abandonment. — It  seems  that  no 
specific  authority  is  vested  in  the  Commission  to  compel 
the  extensions  of  track  to  outlying  districts  near  cities 
or  to  allow  the  abandonment  of  service  upon  tracks  already 
in  operation,  if  the  company  wishes  to  do  so.  The  muni- 
cipality in  the  matter  of  track  abandonment,  it  appears, 
has  exclusive  control.  In  one  decision 2  it  was  shown 
that  neither  the  municipality  nor  the  Commission  had  been 
given  power  by  the  legislature  to  compel  track  extension. 
Unless  provided  by  contract  or  statute  no  extension  could 
be  demanded.  In  another  case  3  it  was  held,  after  quoting 
court  decisions,  that  a  company  cannot  be  compelled  to 
operate  a  non-paying  line,  if  the  city  system  as  a  whole 
is  earning  less  than  a  fair  return.  Nevertheless,  the  Com- 
mission has  made  extensive  formal  investigations  in  various 
cities  and  submitted  recommendations  as  to  the  necessity 
of  track  extension  or  the  advisability  of  abandonment 
whenever  municipal  officials  requested  such  assistance  or 


1  In  re  West  Algoma  Street  Bridge  in  OsKkosh,  1912,  8  W.  E.  C. 
E.,  441;  also  9  W.  E.  C.  E.,  357. 

2  Merrill   v.   Merrill   Railway   $    Lt.    Co.,    1910,   5   W.   E.   C.    E., 
418. 

3  Broivn  v.  Janesville  Street  Railway  Co.,  1910,  4  W.  E.  C.  E.,  757. 


166     RAILROADS  AND  PUBLIC  UTILITIES 

the  situation  arose  in  connection  with  a  formal  case  or  with 
other  matters.  Aside  from  the  questions  referred  to,  it  may 
be  stated  that  orders  have  been  issued  compelling  the  con- 
struction of  double  track  or  sidings  on  interurban  and 
urban  lines  1  when  these  were  essential  to  the  rendition  of 
adequate  transportation  service. 

Miscellaneous. — Orders  of  a  miscellaneous  character 
have  been  issued  from  time  to  time  which  have  improved 
electric  railway  service.  Crosstown  lines  and  a  through 
route  were  ordered  in  instances  to  give  certain  persons  a 
more  direct  route  between  their  residences  and  their  daily 
work.  In  another  case  service  to  an  important  public 
park  was  ordered  resumed  after  it  had  been  abandoned  by 
the  company ;  noisy  operation  on  a  curve  was  abolished  in 
one  case  by  requiring  either  reconstruction  or  proper  main- 
tenance; and  a  definition  was  placed  upon  hand  luggage 
with  the  provision  that  a  ruling  of  the  company  requiring 
baby  carriages  to  be  wrapped  before  allowing  them  upon 
the  cars  was  unreasonable.2 

Rates. — One  of  the  common  sources  of  complaints  is  the 
five-cent  zone  fare  as  applied  to  suburban  and  interurban 
traffic.  No  less  than  fifteen  formal  complaints  and  numer- 
ous informal  complaints  have  been  received  by  the  Com- 
mission in  regard  to  this  system  of  fares.  The  chief  cause 
for  dissatisfaction  is  the  flat  charge  of  five  cents  within  the 
zone  regardless  of  the  respective  length  of  the  zone  or  the 
length  of  passenger  haul  within  the  zone.  Special  ticket 
fares  and  overlapping  zones  have  been  established  by  com- 
panies to  overcome  the  inequalities,  but  these  measures 
have  usually  aggravated  the  situation,  resulting  in  greater 
discrimination.  It  has  been  found  necessary  in  order  to 
establish  equality  or  minimize  inequalities  in  rates  to  abol- 

1  Buergin,  Jr.  et  al.  v.  Southern  Wisconsin  By.  Co.,  1913,  11  W. 
E.  C.  E.,  762. 

'Martin  v.  Southern  Wisconsin  By.  Co.,  1911,  8  W.  E.  C.  E.,  311. 


STREET  AND  INTERURBAN  RAILWAYS   167 

ish  this  zone  system  on  suburban  and  interurban  lines  and 
replace  it  by  either  a  copper  zone  or  a  mileage  system, 
according  to  the  circumstances.  Two  interurban  companies 
in  this  state  operated  under  the  latter  systems  voluntarily 
before  regulation  of  electric  railways  began,  and  only  one 
complaint  has  been  filed  during  the  regulatory  period  which 
attacked  the  competitive  feature  of  the  rates  charged  by 
one  of  these  companies.  On  the  whole,  the  copper  zone 
and  mileage  basis  have  been  found  far  more  satisfactory 
from  the  standpoint  of  equality  between  patrons  than  the 
five-cent  zone.  Accordingly,  wherever  it  has  been  found 
feasible,  a  change  in  rates  has  been  ordered  or  recom- 
mended in  meeting  complaints  against  the  nickel-zone  sys- 
tem. In  other  cases  the  five-cent  zones  have  been  so 
rearranged  as  to  eliminate  the  grossest  discriminations. 
Since  1907  two  companies  have  adopted  the  copper  basis 
for  rates  while  several  are  about  to  change  over.  More 
than  50  per  cent  of  the  track  mileage  is  now  operating 
upon  the  small  zone  or  mileage  basis. 

Another  matter  in  which  the  patrons  of  suburban  and 
interurban  lines  have  been  benefited  by  decisions  is  evi- 
denced by  the  orders  covering  ticket  fares.  Such  com- 
panies sell  reduced  fares  in  blocks  of  tickets  but  claim  that 
it  is  impractical  to  sell  them  upon  the  cars  on  the  conten- 
tion that  the  conductor  is  unable  to  attend  to  the  platform 
duties  properly  and  handle  tickets  at  the  same  time.  Com- 
panies, therefore,  sell  tickets  at  their  offices  only  or  at 
several  additional  places.  Under  such  conditions  these  re- 
duced fares  are  usually  available  to  but  a  few  patrons 
who  are  conveniently  located,  and  the  large  majority  must 
go  to  considerable  inconveniences  to  procure  these  tickets. 
Whenever  it  seemed  reasonable  the  Commission  has  re- 
quired these  tickets  to  be  sold  upon  the  cars  so  as  to  be 
available  to  all  who  desired  to  buy. 

With  respect  to  urban  fares  two  reductions  have  been 


168     RAILROADS  AND  PUBLIC  UTILITIES 

ordered.1  The  reduced  ticket  rate  of  thirteen  for  fifty 
cents  ordered  in  Milwaukee  has  been  appealed  to  the  courts. 
The  Supreme  Court  of  "Wisconsin  and  that  of  the  United 
States  have  upheld  the  legality  of  the  reduction  upon  the 
basis  of  the  appeal.2  In  Superior  a  reduced  fare  of  six 
tickets  for  twenty-five  cents  established  by  the  Commission 
on  November  13,  1912,  has  been  declared  reasonable  by  the 
Circuit  Court  of  Dane  County  and  affirmed  by  the  Su- 
preme Court,  June  1,  1915.  In  urban  centers,  whenever 
it  has  been  practicable  and  not  open  to  abuse,  the  fares 
have  been  supplemented  by  single  or  double  transfers, 
to  relieve  the  patrons  of  paying  two  fares.  In  Milwau- 
kee double  transfers  were  provided  on  a  crosstown  line, 
while  within  the  city  limits  of  Neenah  the  two  companies 
— Wisconsin  Electric  Railway  Company  and  Wisconsin 
Light,  Heat  and  Power  Company — were  compelled  to  es- 
tablish a  single  fare  through  transfer  in  place  of  the  former 
double  five-cent  fare. 

Whenever  a  new  line  is  contemplated,  the  Commission, 
under  the  laws  governing  certificates  of  convenience  and 
necessity,  prevents  duplication  and  the  resulting  ruinous 
competition  by  making  a  careful  survey  of  the  proposed 
construction,  the  density  of  population  to  be  served,  and 
other  traffic  factors. 

In  many  informal  proceedings  the  Commission  is  help- 
ful whenever  it  deems  it  advisable.  In  accounting  or 
engineering,  for  instance,  assistance  is  rendered  daily 
through  correspondence,  or  in  person,  by  members  of  the 
staff  working  in  the  field.  No  definite  record  exists  of  such 
aid,  but  it  is  not  overdrawing  the  situation  to  state  that  a 

1  Milwaukee  v.  Milwaukee  Electric  Ry.  $  Lt.  Co.,  1912,  10  W.  E. 
C.  R.,  1-305;  Superior  Commercial  Club  et  al.  v.  Duluth  Street  Ry. 
Co.,  1912,  11  W.  R.  C.  R.,  1-31. 

2  Milwaukee  Electric  Railway  $•  Light  Co.  v.  Railroad  Commis- 
sion of  Wisconsin,  142  N.  W.  Rep.,  491.  (Sustained  by  U.  S.  Su- 
preme Court,  June  14,  1915.) 


STREET  AND  INTERURBAN  RAILWAYS    169 

considerable  part  of  the  Commission's  work  is  taken  up 
by  these  informal  matters. 

In  addition  it  should  be  stated  that  the  recent  decisions 
in  the  express  cases  have  reduced  rates  upon  these  inter- 
urban  lines  engaged  in  express  business. 

And  finally,  the  law  passed  in  1913  is  of  importance. 
It  provides  for  the  municipal  acquisition  of  any  electric 
railway.  Under  this  law  the  Commission  within  three 
months  after  receiving  notice  fixes  the  compensation  to 
the  electric  railway  for  which  title  may  pass  to  the  muni- 
cipality. Thus  far  no  municipal  purchase  case  of  an  elec- 
tric railway  has  arisen. 


CHAPTER  XII 

ELECTRIC,    GAS    AND    HEATING    UTILITIES 

The  effective  application  of  the  Public  Utility  Law 
to  the  control  of  rates  and  service  of  gas  and  electric 
companies  took  place  almost  immediately  upon  the  enact- 
ment of  the  law.  It  should  not  be  inferred  that  any  hesi- 
tation was  evinced  by  the  Commission  in  applying  the  terms 
of  the  law  to  the  other  classes  of  utilities.  The  circum- 
stances, however,  were  such  that  the  groundwork  for  regu- 
lating the  gas  and  electric  business  could  be  more  quickly 
laid  and  the  results  were  sooner  apparent. 

A  mandatory  provision  of  the  law  directed  that  the 
Commission  should  ascertain  and  fix  suitable  standards 
for  the  supply  of  service.  This  was  in  accordance  with 
the  general  policy  of  this  legislation  looking  toward  the 
betterment  of  public  service  conditions  as  expressed  by 
the  whole  act.  The  provisions  of  this  feature  of  the  law 
and  its  practical  administration  have  already  been  ex- 
plained.1 Following  the  establishment  of  service  standards 
which  were  formally  issued 2  July  24,  1908,  the  service 
department  of  the  Commission  commenced  operations.  The 
state  was  divided  into  districts  and  an  inspector  appointed 
for  each  district  so  created.  This  inspector  makes  periodic 
visits  to  each  utility,  traveling  on  an  unannounced  sched- 
ule.   The  inspection  of  gas  and  electric  plants  has  become 

1  Ch.  V. 

2  In  re  Standards  for  Gas  and  Electric  Service  in  the  State  of 
Wisconsin,  1908,  2  W.  R.  C.  R.,  632;  these  standards  were  revised 
Aug.  9,  1913,  12  W.  R.  C.  R.,  418. 

170 


& 


ELECTRIC,  GAS  AND  HEATING  UTILITIES   171 

less  burdensome  as  the  utility  operators  learn  the  effect  of 
good  service  upon  revenues.  The  number  of  inspections 
per  year  for  each  plant  has  been  reduced  in  late  years. 
Gas  plants  are  seldom  visited  more  than  twice,  while 
the  majority  of  the  electric  plants  receive  but  one  visit. 
Utilities  rendering  poor  service  are  watched  with  more  care 
than  those  of  good  record.  The  size  of  the  city  also  deter- 
mines in  part  the  frequence  of  inspections. 

In  order  to  meet  fully  the  demands  of  the  public  as 
well  as  the  law  many  electric  plants  have  been  rehabili- 
tated. In  other  cases  the  period  of  operation  has  been 
lengthened.  This  is  more  particularly  true  of  the  smaller 
cities,  listed  in  classes  C  and  D,  located  in  towns  of  from 
600  to  3,000  population.  Action  on  the  part  of  the  utilities 
to  this  effect  has  sometimes  been  voluntary,  but  more  often 
stimulated  by  a  suggestion  or  order  of  the  Commission. 
Among  those  smaller  cities  where  the  operating  period  has 
been  lengthened  recently  may  be  mentioned  Omro  and 
Mondovi.  The  extension  of  the  lines  of  the  large  systems 
into  the  country  districts  has  resulted  in  more  uniform 
and  cheaper  service.  Gas  plants  have  raised  the  standard 
of  their  product  to  the  required  mark  wherever  necessary, 
although  it  may  be  said  that  the  first  calorimetric  tests  in 
1908  showed  but  few  cities  in  which  the  gas  produced  was 
below  600  British  thermal  units.  The  greatest  improve- 
ment has  been  in  making  the  pressure  equal  and  uniform. 

In  so  far  as  heating  standards  of  service  are  concerned, 
no  formal  rules  have  been  issued.  Only  ten  cities  of  the 
state  receive  general  heating  service.  The  practices  of  these 
utilities  are  under  the  inspection  and  control  of  the  Com- 
mission. 

The  provisions  of  the  law  with  reference  to  the  making 
of  rates  for  gas,  electric  and  heating  utilities  are  the  same 
as  those  for  other  utility  service.  After  the  enactment  of 
the  law  the  utilities  were  instructed  to  file  with  the  Com- 


172     RAILROADS  AND  PUBLIC  UTILITIES 

mission  all  schedules  effective  April  1,  1907,  for  service 
within  the  state.  The  response  received  from  the  utilities 
was  not  satisfactory  and  accordingly  blank  forms  were 
prepared  in  September,  1907,  for  use  in  filing  the  rates. 
This  procedure  elicited  a  fuller  reply  both  as  regards  the 
number  of  schedules  filed  and  the  completeness  of  the 
classification  of  rates.  In  1912,  the  rate  schedules  effective 
June  1,  1912,  were  compiled  by  the  Commission's  statistical 
department  and  published  so  that  now  the  rates  of  all 
concerns  supplying  utility  service  may  be  examined  and 
compared  without  delving  into  the  maze  of  original  records. 
The  filing  of  rates  revealed  that  considerable  diversity 
existed  in  the  method  of  charging  for  electric,  gas  and 
heating  service.  The  greatest  variety  is  probably  to  be 
noted  for  electric  service.  Among  the  various  forms  of 
electric  schedules,  the  following  may  be  mentioned  as 
indicative  of  what  is  true  to  a  marked  degree  in  the  case 
of  all  classes  of  utilities : 

1.  Flat  Rates  per  Lamp. — Under  this  schedule  all  the 
customers  in  any  class  pay  the  same  amount  regardless 
of  the  amount  of  current  consumed.  These  companies 
sometimes  endeavor  to  establish  classifications  in  which 
the  period  of  use  is  limited,  one  rate  applying  to  use  of 
lamps  until  10  P.  M.,  another  until  12  P.  M.,  and  another 
for  all-night  service.  These  limitations  are  difficult  of  en- 
forcement. The  schedule  usually  leads  to  waste  of  service 
and  inequality  in  the  charges. 

2.  Uniform  or  Straight  Line  Meter  Rate. — All  con- 
sumers pay  the  same  rate  per  kilowatt  hour  under  this 
schedule  regardless  of  the  total  quantity  of  electrical  energy 
consumed. 

3.  Regressive  or  Step  Meter  Rate. — This  schedule  may 
consist  of  a  uniform  rate  per  kilowatt  hour  with  a  ' '  step ' ' 
system  of  discounts  which  results  in  a  regression  of  the 
charge  at  certain  points  of  the  schedule.     In  other  words, 


ELECTRIC,  GAS  AND  HEATING  UTILITIES  173 

this  method  of  charging  is  found  to  be  faulty  because  at 
certain  points  of  the  schedule  it  is  possible  to  reduce  the 
total  charge  by  increasing  the  quantity  of  current  con- 
sumed. 

The  schedule  may  also  consist  of  "step"  rates  without 
the  discounts. 

4.  Increment  or  Block  Meter  Bate. — This  schedule  may 
be  made  of  a  uniform  meter  rate  with  discounts  applying 
to  "blocks"  of  energy,  or  of  varying  meter  rates  applicable 
to  "blocks"  of  energy.  By  "block"  is  meant  a  prede- 
termined number  of  kilowatt  hours  representing  a  portion 
of  the  total  monthly  consumption.  This  method  avoids 
the  regression  in  the  charges  noted  in  the  preceding 
schedule. 

5.  Demand  or  Beadiness-to-Serve  Bates. — 

(a)  Flat  demand  rate.  The  charge  is  based  upon 
only  the  demand  of  consumer;  the  amount  of  energy 
used  is  not  considered.  The  demand  may  be  measured, 
estimated  or  based  on  the  connected  capacity  of  the 
equipment. 

(b)  Wright  demand  rate.  This  rate  consists  of  two 
or  more  charges  applicable  to  "blocks"  of  energy.  In 
this  case,  the  "blocks"  vary  with  a  predetermined 
length  of  use  of  the  maximum  demand.  The  maximum 
demand  may  be  measured,  estimated,  or  assessed  as  a 
percentage  of  the  connected  load.  The  number  of  kilo- 
watt hours  in  each  block  is  determined  by  multiplying 
the  maximum  demand  by  the  number  of  hours  monthly 
which  has  been  fixed  upon.  The  bill  is  found  by  multi- 
plying the  kilowatt  hours  in  each  "block"  of  energy 
by  the  respective  rates. 

(c)  Hopkinson  demand  rate.  Two  charges  are 
made :  one  as  for  "  a "  is  based  on  the  demand  and 
the  other  is  based  on  the  amount  of  energy  used. 

(d)  Hopkinson  block  demand  rate.     This  is  similar 


174     RAILROADS  AND  PUBLIC  UTILITIES 

to  "b"  except  that  the  energy  charge  may  be  deter- 
mined on  a  block  .system  as  in  the  case  of  the  regular 
increment  rate  (4). 

(e)   Three  charge  demand  rate.     In  this  system  of 
rates  there  is  a  charge   per  consumer  or  meter  and 
demand  and  energy  charges  as  in  "b"  and  "c"  above. 
Not  only  are  all  of  these  forms  of  schedules  in  use,  but 
a  utility  may  have  several  of  the  schedules  in  force  simul- 
taneously for  different  classes  of  service  or  as  optional 
schedules  for  the  same  service.    This  situation  complicates 
the  matter  of  classifying  and  comparing  rates  and  charges 
and  of  determining  the  effect  of  proposed  amendments  upon 
consumer's  bills.     The  following  comment  on  the  circum- 
stances existent  in  1907  and  1908  is  quoted  from  the  Com- 
mission's annual  report: 

The  rates  filed  by  the  larger  companies  are  generally  based  x 
upon  scientific  considerations,  but  those  of  the  smaller  companies 
partake  of  every  conceivable  form  and  method  of  determination. 
They  vary  from  the  simple  schedule  of  but  two  or  three  lines  to 
the  most  elaborate  classification  of  consumers.  In  a  majority  of 
instances  there  appears  to  have  been  no  particular  system  followed 
in  determining  the  amount  to  be  charged  for  a  given  service. 
The  process  of  reasoning,  which  in  some  cities  placed  certain 
classes  of  consumers  upon  meter  rates  or  upon  flat  rates,  seems 
to  have  been  exactly  reversed  in  other  cities.  Rates  for  similar 
service  often  vary  several  hundred  per  cent  in  neighboring  cities. 
In  a  number  of  instances  schedules  are  in  force  which  make  some 
concession  in  rates  with  increasing  consumption,  but  the  rates 
have  seldom  been  determined  with  regard  to  the  cost  of  service. 
Too  frequently  the  tendency  is  noticed  to  copy  the  rate  schedule 
of  another  community  with  the  result  that  many  inconsistencies 
in  charges  are  passed  from  city  to  city.  The  majority  of  sched- 
ules on  file,  in  the  effect  of  their  application,  are  not  calculated 
to  secure  the  greatest  development  of  service  with  the  consequent 
reduction  in  the  unit  costs. 

1  Annual  Eeport  Wisconsin  Kailroad  Commission,  1908,  41. 


ELECTRIC,  GAS  AND  HEATING  UTILITIES   175 

Not  only  were  the  rate  schedules  incongruous,  but  wide 
discriminations  were  practiced.1  For  example,  in  one  vil- 
lage of  1,400  inhabitants,  the  electric  company  granted 
special  rates  to  forty-two  out  of  a  total  of  ninety-nine  con- 
sumers. The  amounts  which  those  forty-two  favored  con- 
sumers actually  paid,  and  the  corresponding  schedule 
charge  for  each,  are  diagrammed  in  Fig.  1  below. 


—    —    —    — fy(UHjflJ^J'»JAjru«JW»in»)*liilO»l»11    "1?    t^ 

Reference  No  Individual  Consumer?  Recevinq  -.Special  RqjTeS 

Fig.  1. 

These  graphic  charts  are  taken  from  the  1908  annual  report  of 
the  Eailroad  Commission  of  Wisconsin. 


By  way  of  explaining  the  above  diagram  an  illustration 
may  be  taken.  Consumer  No.  36  was  paying  about  $3.40  per 

xFor  statistics  on  discriminations  practiced  by  utilities  before 
public  utility  regulation  in  Wisconsin,  see  Eeport  of  Eailroad  Com- 
mission, 1908,  49-71. 


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Tbtol    Monthly  Charge  in 


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Fig.  2. 


ELECTRIC,  GAS  AND  HEATING  UTILITIES   177 

month,  while  according  to  schedule  he  should  have  paid 
about  $7.20.  The  margin  between  the  dotted  and  heavy 
lines  represents  the  discrimination,  equivalent  to  a  re- 
bate of  $3.80.  Equally  striking  illustrations  of  discrimina- 
tions, due  to  competitive  conditions,  were  practiced  in 
another  city  of  30,000  inhabitants.  Out  of  2,390  con- 
sumers discriminatory  rates  were  granted  to  121,  which 
amounted  to  an  average  monthly  rebate  of  $1,942.  In  Fig. 
2  are  shown  in  graphic  form  the  121  cases  above  referred 
to,  which  include  eight  cases  where  consumers  were  actually 
charged  more  than  the  schedule  rates  in  effect. 

Through  the  system  of  state  regulation  practically  all 
discriminations  have  disappeared.  In  the  making  of  new 
rates  for  these  utilities  the  Wright  demand  rate  seems  to 
have  met  with  the  most  favor  of  the  Commission  for  elec- 
tric lighting  service  and  the  Hopkinson  demand  rate  for 
power  service.  Eecently,  however,  modifications  of  the 
Hopkinson  schedule  have  been  instituted  by  the  Commis- 
sion through  the  establishment  of  maximum  lighting  rates 
on  the  one  hand  and  minimum  charges  on  the  other. 

For  gas  service  the  Commission  has  generally  adopted  a 
block ' '  system  of  rates.  No  important  changes  have  been 
made  in  the  rates  which  have  been  in  force  for  heating 
service;  but  calculations  which  the  Commission  has  set 
forth  in  some  cases  in  which  heating  service  was  dealt 
with  incidentally,  indicate  that  some  form  of  demand  rate 
may  eventually  meet  with  the  Commission's  approval. 

Although  a  single  form  of  rate  schedule  for  electric 
service  has  not  always  been  adhered  to  by  the  "Wisconsin 
Railroad  Commission,  nevertheless  certain  fundamental 
principles  have  been  followed  and  underlie  the  rates  even 
when  peculiar  circumstances  in  the  case  require  some  de- 
parture from  the  form  of  schedule  which  the  Commission 
appears  to  prefer.  The  method  pursued  by  the  Commis- 
sion in  determining  rates  for  an  electric  utility  was  fully 


178      RAILROADS  AND  PUBLIC  UTILITIES 

described  by  Commissioner  Erickson  in  an  address  on 
"Making  Rates  for  Electrical  Plants,"  delivered  before 
the  Ohio  Electrical  Convention  at  Cedar  Point,  Ohio,  July 
17,  1914.  The  following  is  quoted  from  the  Commission- 
er's address: 

To  make  a  rate  schedule  that  is  just,  not  only  as  between  the 
different  departments  in  the  service,  but  between  the  individual 
customers  in  each  department,  is  no  easier  than  it  is  to  determine 
the  total  revenue  to  which  the  utility  is  entitled.  It  means  a 
close  investigation,  not  only  of  all  expense  items  and  other  oper- 
ating data,  but  of  the  conditions  under  which  the  plant  is  oper- 
ating, and  the  nature  of  the  electricity  business  in  its  various 
phases.  In  other  words,  it  means  that  the  various  expense  items 
must  be  classified  under  demand  and  output  costs,1  the  factors  to 
which,  in  a  general  way,  the  responsibility  for  the  expenses  can 
be  traced.  It  means  further  that  the  demand  and  output  costs 
must,  in  turn,  be  apportioned  between  the  different  departments 
of  the  service,  and  that  methods  must  be  developed  under  which 
these  costs  for  each  department  can  be  fairly  distributed  among 
its  customers  and  under  which  such  costs  per  unit  may  be  com- 
puted as  are  needed  in  determining  upon  proper  rate  schedules. 

The  main  reasons  for  the  necessity  of  thus  apportioning  the 
total  cost  between  demand  and  output  expense  is  found  in  the 
difference  that  exists  in  the  nature  of  these  two  classes  of  costs. 
The  demand  costs,  for  instance,  depend  very  largely  upon  the 
maximum  demand  on  the  station  at  the  time  of  the  peak  load. 
They  are  independent  of  the  output,  or  of  the  amount  of  current 
generated.  The  output  costs,  on  the  other  hand,  depend  largely 
upon  the  amount  of  current  generated  or  sold,  and  vary  there- 
with.   They  are  independent  of  the  demand  on  the  station.     Since 

1  Leading  cases  in  the  apportionment  of  electric  expenses :  In  re 
Application  Stoughton  Municipal  El.  Lt.  System,  1909,  3  W.  R. 
C.  R.,  490;  In  re  Menominee  #  Marinette  Lt.  $•  Tr.  Co.,  1909,  3  W. 
R.  C.  R.,  831.  Gas  Utility  Apportionments:  State  Journal  Printing 
Co.  et  al.  v.  Madison  Gas  Sr  Electric  Co.,  1910,  4  W.  R.  C.  R.,  735, 
737;  City  of  Bacine  v.  Bacine  Gas  Light  Co.,  1911,  6  W.  R.  C.  R., 
141;  City  of  Beloit  v.  Beloit  Water,  Gas  $  Electric  Co.,  1911,  7  W. 
R.  C.  R.,  187. 


ELECTRIC,  GAS  AND  HEATING  UTILITIES  179 

the  demand  costs  depend  on  the  maximum  demand,  they  should 
also  be  distributed  on  the  demand.  Likewise,  since  the  output 
expenses  depend  on  the  output  of  current,  they  should  be  dis- 
tributed upon  this  output. 

The  effect  of  these  rules  may  be  illustrated.  For  a  plant 
having  a  total  yearly  demand  cost  of,  say,  $154,000,  and  a  maxi- 
mum demand  at  the  time  of  the  peak  load  of,  say,  3,850  kilowatts, 
the  yearly  demand  cost  per  kilowatt  would  be  $40.  This  cost 
would  remain  about  the  same  whether  the  plant  was  in  operation 
one  hour  daily,  and  thus  turned  out  one  kilowatt  hour  per  day 
for  each  kilowatt  demanded,  or  whether  it  was  in  operation  five 
hours  daily  or  more  and  turned  out  five  kilowatt  hours  of  current 
daily  for  each  kilowatt  demanded.  In  other  words,  the  demand 
or  capacity  cost  per  kilowatt  is  about  the  same  when  the  fixtures 
are  used  one  hour  per  day  as  when  they  are  used  five  or  more 
hours  per  day,  but  when  the  demand  cost  per  kilowatt  is  distribu- 
ted over  the  hours  of  the  daily  use  of  the  fixtures  or  installation 
the  situation  is  different.  In  this  ease  the  demand  cost  per 
hour,  or  kilowatt  hour,  under  the  above  figures,  would  be  eleven 
cents  for  the  one-hour  users,  while  for  the  five-hour  users  it  would 
amount  to  only  about  2.20  cents. 

These  variations  in  the  demand  cost,  with  variations  in  the 
hours  of  daily  use  of  the  fixtures  or  plant,  also  greatly  affect  the 
total  unit  cost;  that  is,  the  unit  cost  when  it  includes  both  the 
demand  and  the  output  expense.  For  instance,  if  the  above  plant 
had  an  output  cost  of  $62,000  per  year  and  sells  about  3,900,000 
kilowatt  hours  of  current,  the  output  cost  per  kilowatt  hour  sold 
will  be  about  1.60  cents  per  kilowatt  hour.  This  cost,  as  stated, 
remains  about  the  same  per  kilowatt  hour,  regardless  of  the  time 
of  operation.  When  this  output  is  added  to  the  demand  costs  it 
is  found  that  the  total  cost  per  kilowatt  hour  is  about  12.6  cents 
for  those  who  use  their  fixtures  one  hour  per  day  and  about  3.8 
cents  for  those  who  use  their  fixtures  or  current  five  hours  daily. 

The  figures  thus  given  are  not  absolute,  but  they  are  nearly 
enough  so,  to  show  the  importance  of  the  demand  factor  in  rate- 
making.  In  fact,  the  effect  of  the  demand  upon  the  costs  is  such 
that  it  would  seem  that  few  rate  schedules  can  very  well  be 
equitable  in  which  this  has  not  been  taken  into  consideration. 


180     RAILROADS  AND  PUBLIC  UTILITIES 

This  is  also  likely  to  remain  true  until  some  means  have  been 
discovered  by  which  current  can  be  successfully  and  cheaply 
stored,  so  that  the  peak  demand  can  be  supplied  from  that  source, 
and  the  capacity  and  investment  of  the  plant  can  be  adjusted  to 
the  average  load  rather  than   to   the  peak  load. 

The  necessity  for  apportioning  the  total  demand  cost  between 
the  departments  arises  from  the  fact  that  some  departments  are 

Table  Showing  Cost  Per  Unit  Decreases  With  the  Increasing 
Use  of  Electric  Service 


Number  of  hours  during  which 

the  consumer's  load  is  used 

daily    or    the    number    of 

kilowatt  hours  used  daily 

per  kilowatt  of  active 

load 

Demand 
cost  per 
kilowatt 
per  day 

Output 
cost  at 
1.6  cts. 

per 
kilowatt 

hour 

Total 
cost 

Total 
cost  per 
kilowatt 

hour 

1 

cts. 

11.0 

11.0 

11.0 

11.0 

11.0 

11.0 

11.0 

11.0 

11.0 

11.0 

11.0 

11.0 

11.0 

cts. 

1.6 

3.2 

4.8 

6.4 

8.0 

9.6 

11.2 

12.8 

14.4 

16.0 

24.0 

32.0 

38.4 

cts. 

12.6 

14.2 

15.8 

17.4 

19.0 

20.6 

22.2 

23.8 

25.4 

27.0 

35.0 

43.0 

49.4 

cts. 
12.60 

o 

7.10 

3 

5.27 

4 

4.35 

5 

3.80 

6 

3.43 

7 

3.17 

8 

2.98 

9 

2.83 

10 

2.70 

15 

2.33 

20 

2.15 

24 

2.06 

responsible  for  greater  demand  charges  than  others,  and  that, 
within  certain  limits  at  least,  it  is  proper  that  these  differences 
should  be  recognized  in  the  rates.  Incandescent  lighting,  for  in- 
stance, is  a  peak  load,  short-hour  business,  with  a  high  demand 
and  consequently  high  demand  cost.  Power,  on  the  other  hand, 
may  be  largely  an  off-peak  long-hour  business,  with  a  relatively 
low  demand  and  therefore  low  demand  cost.  Not  to  consider 
such  differences  of  costs  in  rate-making  would  seem  unfair,  as 
well  as  poor  business  policy. 

Some  departments  also  have  a  relatively  lower  output  cost 


ELECTRIC,  GAS  AND  HEATING  UTILITIES  181 

than  others.  This  is  mainly  due  to  differences  in  the  length  and 
costs  of  the  distribution  systems  and  of  a  few  other  items  that 
belong  to  specific  departments.  While  these  differences  in  the 
output  costs  may  not  be  great,  they  often  amount  to  enough  so 
as  to  require  detailed  separations  of  the  output  cost  as  between 
the  departments. 

In  apportioning  the  cost,  as  between  demand  and  output  ex- 
penses, those  items  which  come  directly  in  one  class  or  the  other 
are  placed  where  they  belong.  Those  items,  on  the  other  hand, 
which  are  indirect  or  common  to  all  classes,  are  more  difficult 
to  deal  with.  Such  items  must  be  apportioned  partly  in  propor- 
tion to  the  direct  items  upon  which  they  may  depend  and  partly 
on  the  operating  unit  to  which  they  bear  the  closest  relations.  .  .  . 

The  demand  and  output  costs,  when  thus  determined,  must, 
as  stated,  be  apportioned  among  the  different  departments  of  the 
service.  These  departments  usually  consist  of  the  incandescent 
lighting,  street  lighting  and  power.  Owing  to  variations  in  the 
demand  or  active  load,  as  between  different  classes  of  consumers 
in  the  incandescent  department,  it  is  also  as  a  rule  necessary 
to  divide  the  costs  for  this  department  among  these  classes.  This 
division,  however,  is  usually  effected  through  adjustments  of  the 
active  load.   .    .    . 

The  term  "active  connected  load"  would  seem  to  require  ex- 
planation. By  this  term  is  usually  meant  such  proportion  of  the 
connected  load  for  each  department,  class,  and  individual  cus- 
tomer, as  has,  in  each  case,  been  found  proper  upon  investigation. 
The  active  load,  when  carefully  determined  and  applied,  would 
seem  to  be  as  equitable,  convenient  and  practicable  a  basis  for 
apportionments  and  charges  as  any  method  that  can  be  used  for 
this  purpose.  One  reason  why  it  meets  the  requirements  is,  that 
in  any  given  city  there  is  considerable  uniformity  in  the  use  which 
given  classes  of  customers  make  of  their  installations.  That  this 
is  actually  the  case  has  been  established  by  extensive  and  careful 
examinations  of  numerous  customers'  records,  demand  meters  and 
other  facts.  Thus  it  has  been  found  that  for  several  cities,  which 
resemble  each  other  in  size,  kind  of  users,  and  type  generally, 
the  proportion  of  active  to  connected  load  varies  from  forty  to 
fifty  per  cent  for  residences,  from  fifty  to  eighty  per  cent  for 


182     RAILROADS  AND  PUBLIC  UTILITIES 

stores  of  various  kinds  and  between  other  limits  for  other  classes. 
Consumers  who  make  about  the  same  use  of  their  fixtures  can 
also,  as  a  rule,  be  safely  placed  in  the  same  class  with  respect 
to  their  active  load.  This  conclusion  is  based  upon  considerable 
experience  in  the  matter.  The  check  that  is  afforded  in  this  re- 
spect by  the  ordinary  wattmeter  is  also  a  factor.   .    .    . 

When  the  unit  costs  for  each  department  of  the  service,  and 
the  active  load  for  each  class  of  customers  in  each  of  these  de- 
partments, have  been  determined,  when  rate  schedules  have  been 
made  up  therefrom,  then  it  becomes  necessary  to  also  find  some 
method  for  computing  the  monthly  bills  of  the  customers  under 
which  both  the  demand  and  the  output  costs  are  fairly  distributed. 
There  are,  of  course,  more  ways  than  one  in  which  this  can  be 
done.  Under  the  method  of  rate-making  here  outlined,  however, 
the  best  way  is  to  compute  it  on  the  basis  of  the  hours  of  use  of 
the  active  load,  as  fixed  in  the  rate  schedule  for  the  various 
classes. 

The  method  of  rate-making  that  has  been  outlined  herein, 
differs  from  the  so-called  "readiness-to-serve"  method  mostly  in 
the  way  the  demand  costs  are  treated.  Under  the  latter  method, 
the  total  demand  cost  is  determined  in  about  the  same  manner 
as  that  described  herein,  but  the  rate  schedules  are  mostly  made 
up  of  a  so-called  seiwice  charge  covering  all,  or  a  part  of  the  de- 
mand cost,  and  of  a  meter  charge  covering  the  balance  of  the 
expenses.  This  method  would  seem  to  be  even  more  logical,  as 
well  as  more  convenient,  than  the  method  here  described,  but  its 
adoption  is  often  impracticable  because  of  objections  to  it  by 
many  incandescent  customers,  who  seem  to  think  that  the  service 
charge  represents  something  else  than  a  part  of  the  necessary  cost 
of  the  service. 

When  it  comes  to  the  power  service,  however,  these  objec- 
tions to  the  "readiness  to  serve"  method  do  not  seem  to  exist,  and 
to  this  service,  therefore,  this  method  may  be  applied.   .    .    . 

Proper  treatment  of  the  demand  factor  and  for  the  costs  for 
which  it  is  responsible  is  also  of  the  greatest  importance,  because 
of  its  effect  upon  the  development  of  the  business  of  the  plant. 
Experience  has  demonstrated  that  rate  schedules,  based  on  cost 
curves,  have,  with   very  few  exceptions,   proved  to  be  the  best 


ELECTRIC,  GAS  AND  HEATING  UTILITIES   183 

possible  business  developers.  They  not  only  attract  new  business 
but  they  encourage  additional  uses  for  existing  installations. 
They  do  this  because  they  are  adjusted  to  the  situation  in  this 
field,  and  because  they  recognize  the  fact  that  such  additional 
use  of  the  fixtures  is  not  accompanied  by  material  increases  in  the 
demand  costs.  Any  method  of  which  all  this  can  be  said  is  of  as 
great  a  value  in  the  utility  field  as  in  the  industrial  field  gener- 
ally. 

The  table  on  page  180  shows  that  the  decreasing  cost 
of  electric  service  is  applicable  to  the  entire  business  of 
the  company  whose  business  was  discussed,  but  in  order  to 
illustrate  how  the  Commission  arrives  at  a  rate  for  light- 
ing service  we  may  assume  that  this  table  applies  only  to 
the  lighting  portion  of  the  business.  It  will  be  noticed  that 
for  one  hour's  daily  use  of  the  load  the  cost  is  12.6  cents 
per  kilowatt  hour,  from  which  it  runs  down  to  about  2 
cents  per  kilowatt  hour,  when  the  load  is  in  use  twenty-four 
hours.  Various  combinations  of  charges  on  the  Wright 
demand  system  of  rates  could  be  selected  but  judgment 
must  be  exercised  regarding  what  steps  will  conform 
most  closely  to  the  variation  in  the  cost  while  giving  con- 
sideration to  the  reasonable  maximum  charge  and  to  the 
benefits  growing  from  development  of  the  business.  In 
this  particular  case  the  investigator  may  conclude  that  the 
rate  should  be  12  cents  for  the  first  hour's  daily  use,  or 
the  first  30  hours '  monthly  use  of  the  active  load ;  6  cents 
for  the  next  60  hours'  use  of  the  active  load  and  2  cents 
for  all  current  consumed  in  excess  of  90  hours'  use  of  the 
active  load.  The  following  table  shows  the  variation  in 
the  average  charge  to  any  consumer  when  using  current 
under  this  schedule. 

The  customer 's  bill  would  be  computed  in  the  following 
manner.  The  total  rated  capacity  of  the  load  of  the  cus- 
tomer's lamps  would  be  ascertained  and  recorded  on  the 
books  of  the  company.     The  active  load  would  be  deter- 


184      RAILROADS  AND  PUBLIC  UTILITIES 


Hours'  use  of  active  load  daily 

Average  rate 
per  kilowatt 
hour — cents 

1                                           

12.0 

2    .                              

9.0 

3                                   

S.O 

4   .          ...                  

6.5 

5                               

5.6 

6                                       

5.0 

4.6 

8   .                              

4.2 

mined  by  calculation.  Let  us  assume  that  in  the  classifica- 
tion of  consumers  the  rate-maker  has  concluded  that  for 
residences  60  per  cent  of  the  first  500  watts  connected  for 
lighting  purposes  shall  be  deemed  active  and  everything 
in  excess  of  500  watts,  33%  per  cent  active.  Then  the 
active  load  for  a  residence  with  a  total  of  1,100  watts  con- 
nected would  be  700  watts.  Thirty  hours'  use  of  the  active 
load  is  21  kilowatt  hours,  and  this  customer  would  have 
to  pay  the  highest,  or  primary  rate,  for  all  current  up  to 
and  including  21  hours.  Sixty  hours'  use  of  the  active 
load  is  equivalent  to  42  kilowatt  hours.  The  consumer 
would  have  to  pay  the  secondary  rate,  or  six  cents  for 
current  consumed  between  21  and  63  hours.  All  use  above 
63  kilowatt  hours  would  be  charged  for  at  the  excess  or 
2-eent  rate.  Suppose  the  consumer  with  an  active  load  of 
700  watts  used  100  kilowatt  hours  per  month.  The  bill 
would  then  be  as  follows : 

21  kilowatt  hours  at  12  cts $2 .  52 

42  kilowatt  hours  at  6  cts 2 .  52 

37  kilowatt  hours  at  2  cts 74 

Total S5.7S 


The  effect  of  the  Wright  demand  rate  is  to  cause  the 
customer's  average  rate  to  vary  according  to  the  relation 
of  the  current  consumed  and  the  active  load. 


ELECTRIC,  GAS  AND  HEATING  UTILITIES   185 

MAKING    OF    GAS    EATES 

In  the  gas  business,  similar  elements  of  cost  are  to  be 
found  but  the  rate-maker  does  not  have  at  his  disposal  any 
practical  method  of  ascertaining  and  classifying  consumer's 
demands.  Fortunately,  however,  the  element  of  demand 
does  not  exert  so  strong  an  influence  on  the  cost  of  pro- 
duction in  the  gas  business  as  in  most  of  the  other  classes 
of  utility  service  because  the  employment  of  large  gas- 
holders makes  it  possible  to  store  gas  against  the  coincident 
peak  demands  of  the  consumers.  But  since  many  of  the 
expenses  are  found  to  bear  some  close  relation  to  the 
number  of  consumers,  a  uniform  rate  even  for  gas  service 
does  not  appear  to  lead  to  an  equitable  distribution  of  the 
expense  burden.  It  is  interesting  to  note  how  the  tables 
of  decreasing  cost  and  the  block  schedules  are  derived  by 
the  Commission. 

We  shall  take  for  an  example  a  gas  plant  whose  total 
annual  sales  are  60,000,000  cubic  feet  of  gas,  and  number 
of  customers  served,  3,000.  The  annual  expense  of  carry- 
ing on  the  business  of  this  plant,  including  the  fixed 
charges  as  well  as  current  operating  expenses,  amount  to 
$60,000,  of  which  25  per  cent,  or  $15,000,  is  found  to  bear 
a  close  relation  to  the  number  of  customers  supplied,  while 
the  remaining  75  per  cent,  or  $15,000,  is  more  closely 
related  to  the  actual  volume  of  business.  This  is  a  typical 
case  as  applied  to  the  gas  industry. 

The  number  of  bills  that  must  be  rendered  annually  at 
the  rate  of  one  each  month  for  each  customer  is  36,000 ; 
and  since  the  consumer  expense  is  very  largely  an  expense 
that  all  consumers  are  responsible  for  and  should  bear 
equally,  according  to  the  cost  of  service  theory,  the  number 
of  bills  or  "consumer  months"  may  be  divided  into  the 
expense  to  ascertain  this  monthly  amount  that  each  con- 
sumer should  bear  even  when  no  gas  has  been  used.     In 


186     RAILROADS  AND  PUBLIC  UTILITIES 

this  instance  it  is  found  that  the  consumer  expense  amounts 
to  approximately  42  cents  per  consumer  per  month.  The 
balance  of  the  expense,  which  may  be  termed  the  ' '  output ' ' 
cost,  is  $45,000  and  is  equivalent  to  75  cents  per  1,000  cubic 
feet  of  gas  sold.  This  is  what  each  consumer  should  pay 
for  each  1,000  cubic  feet  in  addition  to  the  consumer  ex- 
pense. Consequently,  if  a  consumer  uses  1,000  cubic  feet 
of  gas  in  one  month,  the  total  cost  of  that  gas  will  be 
$1.17.  If,  however,  2,000  cubic  feet  of  gas  be  used,  the 
cost  will  be  still  further  increased  by  75  cents,  making  the 
total  bill  $1.92,  or  a  cost  per  1,000  cubic  feet  of  96  cents. 
This  decreasing  cost  may  be  more  clearly  illustrated  by 
putting  the  figures  in  tabular  form. 

Table  op  Decreasing  Cost  of  Gas 


Cubic  feet  per  month 


1,000 

2,000 

3,000 

4,000 

5,000 

10,000 

25,000 

50,000 


Consumer 
cost 


1.42 
.42 
.42 
.42 
.42 
.42 
.42 
.42 


Output  cost 


$0.75 
1.50 
2.25 
3.00 
3.75 
7.50 
18.75 
37.50 


Total  cost 


$1.17 
1.92 
2.67 
3.42 
4.17 
7.92 
19.17 
37.92 


Total  cost' 
per  1,000 
cubic  feet 


$1,170 
.960 
.890 
.850 
.834 
.792 
.766 
.758 


The  block  schedule  of  rates  may  now  be  fixed  upon,  and 
the  resultant  charges  may  be  made  to  conform  to  a  reason- 
able degree  with  the  variation  of  cost  shown  by  the  follow- 
ing table.  As  in  the  case  of  electric  business,  the  rate 
schedule  to  be  adopted  will  be  influenced  by  many  circum- 
stances, but  the  cost  analysis  is  the  framework  upon  which 
the  schedule  may  be  constructed.  In  the  case  of  the  par- 
ticular circumstances  set  forth  here  it  appears  that  the  rate 
should  be  as  follows: 


ELECTRIC,  GAS  AND  HEATING  UTILITIES   187 


First . . .  1,000  cubic  feet  per  month,  $1 .  10  per  1,000  cubic  feet 
Next. . .  4,000  cubic  feet  per  month,  1 .00  per  1,000  cubic  feet 
Next.  . .  5,000  cubic  feet  per  month,  .75  per  1,000  cubic  feet 
All  over  10,000  cubic  feet  per  month,      .70  per  1,000  cubic  feet 


The  effect  of  this  schedule  upon  the  average  charge  to 
the  consumers  is  shown  by  the  following  table: 

Average  Gas  Rate  Curve 


Amount  used  monthly 


1,000 

2,000 

3,000 

4,000 

5,000 

6,000 

7,000 

8,000 

9,000 

10,000 

12,000 

20,000 

30,000 

50,000 


Average  charge 

per  1,000 

cubic  feet 


$1.10 
1.05 
1.03 
1.02 
1.02 
.975 
.940 
.920 
.900 
.875 
.835 
.742 
.695 
.659 


One  of  the  conditions  necessary  for  the  determination 
of  equitable  rates  was  furnished  by  the  legislature  when 
it  provided  by  law  that  all  utilities  should  report  annually 
to  the  Commission  the  details  of  their  business.  In  1908 
there  were  230  electric,  52  gas  and  13  heating  utilities. 
Under  the  jurisdiction  of  the  Commission,  the  number 
increased  to  257  electric,  52  gas  and  14  heating  utilities  in 
1913.  Year  by  year  the  reports  of  these  utilities  have  been 
studied  and  analyzed ;  their  revenues,  expenses,  investment 
and  other  operating  data  have  been  reduced  to  units  and 
sorted  into  groups.     The  information  has  become  public 


188     RAILROADS  AND  PUBLIC  UTILITIES 

information  through  the  Commission's  publications.  Any- 
one may  now  ascertain  the  circumstances  surrounding  the 
operation  of  any  utility  in  the  state  and  its  relative  stand- 
ing with  other  similar  concerns  by  examination  of  the 
statistical  standards  determined  annually  by  the  Commis- 
sion. The  framers  of  the  law  early  foresaw  the  neces- 
sity of  a  uniform  classification  of  accounts,  for  of  little 
value  to  the  public  or  the  regulative  body  would  be  all 
the  statistical  comparisons,  if  no  uniformity  existed  in 
the  classification  of  earnings  and  expenses.  As  it  is,  how- 
ever, the  statistical  data  serve  an  important  part  in  fixing 
rates. 

Close  investigation  must  usually  be  made  into  the  opera- 
tion of  each  utility  whose  rates  are  before  the  Commission 
for  consideration,  for  public  utilities,  like  individuals,  have 
their  peculiar  environments  and  life  history  which  must 
be  considered  in  the  proper  diagnosis  of  the  case.  But 
comparisons  which  established  standards  of  revenue,  ex- 
pense, volume  of  business  and  similar  data,  often  reveal  at 
a  glance  abnormal  conditions  which  otherwise  might  re- 
quire weeks  of  careful  study  to  discover.  Some  conception 
of  this  may  be  learned  from  statistical  comparisons  of  the 
electric  and  gas  business,  illustrated  by  figures  taken  from 
the  Commission's  annual  reports.  The  following  table  is  a 
summary  of  some  of  the  data  for  Class  A  electric  utilities, 
numbering  about  27.  The  minimum  and  maximum  figures 
show  the  wide  range  for  different  utilities  operating  prob- 
ably under  different  conditions;  the  average  or  median 
figures  indicate  the  normal  amount. 

Let  us  see  how  statistical  comparisons  have  been  applied 
in  some  actual  rate  cases.  In  1912,  the  rates  of  a  certain 
Class  A  gas  plant  were  before  the  Commission  for  investiga- 
tion upon  complaint  of  the  city  in  which  it  is  located.  The 
comparison  of  expenses  which  had  been  made  by  the  Com- 
mission for  the  preceding  year  showed  that  the  total  direct 


ELECTRIC,  GAS  AND  HEATING  UTILITIES    189 


Some  Statistics  for  Class  A  Electric  Utilities  for  Year  Ending 

June  30,  1912 


Revenue 

per  kilowatt 

hour 

Operating 
expenses* 

per 

kilowatt 

hour 

Power 

generation 

per 

kilowatt 

hour 

Meter 
reading 
and  deliver- 
ing bills 
per  meter 

Minimum 

cts. 
0.73 
8.18 
3.42 
3.38 

cts. 
0.10 
4.45 
1.81 
1.85 

cts. 
0.04 
3.21 
1.11 
1.12 

cts. 
10  5 

Maximum 

80  1 

Average 

32.0 

Median 

25.9 

*  Excluding  depreciation,  taxes  and  interest. 


expenses,  less  earnings  from  residual  products,  were  80.6 
cents  per  1,000  cubic  feet  of  gas  sold,  while  the  normal 
figures  for  other  gas  companies  of  the  same  class  were  68.5 
cents  per  1,000  cubic  feet.  The  discovery  of  this  difference 
in  the  cost  of  carrying  on  the  business  led  at  once  to  a 
more  complete  comparison  of  the  statistical  units  and  it 
was  found  further  that  the  yield  of  gas  per  pound  of  coal 
carbonized  was  considerably  less  than  the  normal  amount; 
that  the  amount  of  lost  and  unaccounted  for  gas  was  much 
more  than  usual  and  that  maintenance,  especially  of  the 
distribution  system,  considerably  exceeded  the  average  cost. 
These  matters  were  taken  up  with  the  company's  manager, 
who  explained  that  his  company,  which  had  recently  ac- 
quired the  gas  property,  had  found  the  equipment  in  a 
run-down  condition.  The  gas  retorts  in  which  the  coal 
was  heated  to  drive  off  the  gas  in  the  coal  were  in  need 
of  repairs.  On  this  account  an  appreciable  amount  of  gas 
was  lost  without  even  being  measured  by  the  station  meter, 
so  that  the  amount  of  gas  delivered  to  the  holders  was 
actually  less  per  pound  of  coal  used  than  most  companies 
were  able  to  show. 


190     RAILROADS  AND  PUBLIC  UTILITIES 


Electric  Utilities — Class  A,  Current  Unaccounted  for,  Year 

Ending  June  30,  1911 


Location 


Appleton .  .  . 

Beloit 

Eau  Claire . . 
Fond  du  Lac 
Green  Bay. . 

Green  Bay.. 
Janesville. . . 

Kenosha 

Kenosha 

La  Crosse... 

La  Crosse . . . 

Madison 

Manitowoc  . 
Milwaukee.. 
Milwaukee. . 

Milwaukee. . 
Milwaukee.. 
Oshkosh .... 
Superior .... 
Superior .... 
Watertown  . 


Name  of  company' 


W.T.L.H.&  P.Co 
B.W.G.&E.Co. 
C.V.R.L.&P.Co 
E.W.R.&  P.Co 
G.&E.Co 

Hydro  El.  Co 

J.E.Co 

G.&El.Co.. 
El.Ry.Co... 
G.&El.Co.. 

W.Power  Co 
S.Wis.P.Co. 
M.E.L.Co.. 
Com.Pr.Co. 
T.M.E.R.&L.Co 


M.L.H.&T.Co 
Wells  Pr.Co.. 

O.G.L.Co 

W.L.&P.Co.  . 
North  Pr.Co.. 
W.G.&E.Co... 


Minimum. 
Maximum 
Average.  . 
Median . . . 


Total 
kilowatt 

hours 
made  and 
purchased 


2,349,619 

1,789,978 
3,736,990 
2,964,777 
3,620,530 

6,188,577 
2,410,656 
1,309,825 
894,510 
4,816,390 

7,218,800 

48,948,446 

933,482 

5,082,283 
30,176,888 

4,563,318 
1,493,061 
3,326,600 
2,807,960 
11,158,000 
1,202,531 


894,510 

4S,948,446 

6,952,05S 

2,964,777 


Total 
kilowatt 

hours 
sold  and 

used 


1,927,828 
1,528,730 
2,802,743 
2,598,253 
2,910,161 

5,257,565 

1,872,227 

937,887 

869,128 

4,171,910 


5,732,231 1,486,569 
46,593,654  2,354,792 


Total 
kilo- 
watt 
hours 
loss 


421,991 
261,248 


366,524 
710,369 

931,012 
538,429 
371,948 

25,382 
644.4S0 


551,846 
4,661,813 
23,697,213 

3,572,277 
1,336,053 
2,835,555 
2,189,044 
10,467,672 
939,339 


551,846 

46,593,654 

6,069,192 

2,802,743 


381,636 

420,470 

6,479,675 

991,041 
157,00S 
490,945 
618,916 
690,328 
263,192 


25,382 

6,479,675 

930,298 

514,687 


Per 

cent 
loss 


17.82 
14.65 


12.32 
19.62 

14.09 
22.19 
28.42 
27.01 
13.35 

20.26 
4.82 

40.91 
8.25 

21.24 

21.72 
10.51 
14.41 
22.04 
6.19 
21.89 


4.89 
40.91 
18.09 
18.72 


The  distribution  system  was  in  a  very  poor  and  leaky 
condition  because  the  system  had  not  been  carefully  main- 
tained in  the  earlier  days.  According  to  the  facts  related 
by  the  manager,  the  drip  pots,  which  are  devices  used 
in  the  distribution  system  to  catch  the  condensation,  had 
been  made  of  kegs  or  small  barrels,  and  because  of  the  poor 


ELECTRIC,  GAS  AND  HEATING  UTILITIES  191 

connections  resulting  from  such  fittings,  gas  was  blown 
quite  freely  into  the  air  at  many  places. 

The  efforts  used  by  the  new  owners  to  rehabilitate  the 
system  considerably  increased  the  expenditures  for  main- 
tenance during  the  period  immediately  prior  to  the  time 
of  the  investigation.  It  was  also  found  that  this  concern 
maintained  no  depreciation  reserve  but  charged  all  renewals 
to  expenses  as  a  cost  of  maintenance.  The  manager  agreed 
at  a  conference  with  a  representative  of  the  Commission 
that  in  fixing  rates  for  his  company  it  would  be  fair  and 
proper  to  take  into  consideration  the  fact  that  the  amount 
of  gas  from  each  pound  of  coal  could  and  would  be  in- 
creased, that  the  amount  lost  in  distributing  to  the  con- 
sumers would  be  reduced,  that  maintenance  of  the  system 
would  be  less  when  the  rehabilitation  had  been  completed, 
and  that  the  cost  of  repairs  would  be  reduced  if  renewals 
were  taken  care  of  by  a  depreciation  reserve.  Thus,  by 
comparisons,  the  investigator  had  been  able  to  place  his 
finger  upon  the  vital  causes  of  the  unusually  high  expenses 
without  having  seen  the  gas  plant. 

The  effective  use  of  the  comparative  data  may  be  illus- 
trated also  by  the  facts  brought  out  during  the  investiga- 
tion of  rates  of  another  gas  company  concerning  which 
the  following  statement  was  made  by  the  Commission: 

The  mileage  of  mains  (of  this  company)  is  about  25  per  cent 
less  per  1,000  population  than  for  other  Class  A  gas  utilities  in 
Wisconsin,  and  as  might  be  expected,  we  find  that  the  number  of 
consumers  per  1,000  population  is  correspondingly  several  per 
cent  smaller.  But  further  comparison  reveals  that  the  number 
of  consumers  per  mile  of  main  is  from  18  to  20  per  cent  greater 
than  for  Class  A  utilities  and  that  the  cost  of  reproduction  per 
mile  is  about  23  per  cent  more  than  the  average  or  normal  amount 
elsewhere.  These  factors  indicate  plainly  that  the  respondent's 
distribution  system  is,  generally  speaking,  limited  to  the  districts 
where  the  desire  for  service  connection  is  greatest,  and  that  the 


192     RAILROADS  AND  PUBLIC  UTILITIES 

tributary  and  less  costly  portion  of  the  system  has  not  been 
greatly  extended. 

The  failure  of  the  company's  management  to  take  full 
advantage  of  the  business  opportunities  made  the  invest- 
ment unusually  high  in  proportion  to  the  volume  of  busi- 
ness and  for  this  reason  it  appeared  proper  to  the  Com- 
mission to  allow  a  lower  rate  of  return  on  the  investment 
than  usual  until  the  development  of  the  business  should 
become  more  normal. 

By  continually  auditing  and  comparing  the  statistics 
of  the  plants,  profits  in  excess  of  a  reasonable  return  are 
also  disclosed.  For  example,  in  the  case  of  the  Madison 
Gas  and  Electric  Company  there  have  been  two  orders 
made  reducing  electric  rates  since  the  original  investigation 
in  1910.  Both  of  the  latter  orders  were  made  upon  the 
Commission's  own  motion  as  soon  as  the  profits  had  ex- 
ceeded a  certain  ratio.  The  annual  saving  to  the  Madison 
public  as  the  result  of  these  orders  is  approximately 
$-40,000. 

In  fourteen  gas  and  thirteen  electric  plants  orders  have 
been  entered  reducing  rates  and  in  eight  cases  substantial 
increases  asked  for  by  gas  and  electric  concerns  have  been 
refused.  Had  there  been  no  Commission  to  interfere  these 
increases  would  have  been  made  by  the  companies.  Com- 
puting the  1913  gas  and  electric  sales  in  the  plants  where 
reductions  were  ordered  on  the  basis  of  the  old  rates  and 
then  comparing  the  totals  with  the  results  obtained  under 
the  rates  fixed  or  recommended  by  the  Commission,  the 
annual  public  savings  exceed  $140,000  for  electricity  and 
over  $300,000  for  gas.  These  totals  do  not  take  into  con- 
sideration the  savings  due  to  increasing  the  standards  of 
the  products  furnished. 


CHAPTER  XIII 

TELEPHONE    UTILITIES 

The  work  of  the  Commission  in  so  far  as  it  relates  to 
telephone  utilities  was  begun  with  the  enactment  of  the 
Public  Utility  Law  in  1907,  which  delegates  to  the  Com- 
mission the  power  to  "supervise  and  regulate  every  public 
utility  in  this  state  and  to  do  all  things  necessary  and 
convenient  in  the  exercise  of  such  power  and  jurisdiction." 
The  law  further  defines  the  term  "public  utility"  so  as  to 
include  every  corporation,  company,  individual,  association 
of  individuals,  their  lessees,  trustees,  or  receivers  appointed 
by  any  court  whatsoever  and  every  town,  village  or  city 
that  now  or  hereafter  may  own,  operate,  manage,  or  con- 
trol any  plant  or  equipment  "or  any  part  of  a  plant  or 
equipment  within  the  state,  for  the  conveyance  of  telephone 
messages  .  .  .  to  or  from  the  public."  The  act  also 
specifies  that  every  public  utility  shall  file  at  such  time 
and  in  such  form  as  the  Commission  shall  designate,  a 
report  of  its  operating  and  financial  conditions  and  shall 
also  file  with  the  Commission  and  keep  up  to  date  all 
schedules  of  its  rates,  tolls  and  charges. 

It  is  thus  seen  that  the  Commission  is  given  full  regu- 
latory supervision  over  practically  all  telephone  utilities 
in  the  state. 

"With  the  passage  of  the  law  in  1907  the  schedules  of 
rates  and  toll  charges  of  the  various  telephone  companies 
in  the  state  were  filed  with  the  Commission.  A  casual 
survey  of  the  rates  as  they  were  filed  disclosed  the  fact 
that  there   were  many   irregularities   and   discriminations 

193 


194     RAILROADS  AND  PUBLIC  UTILITIES 

being  practiced  by  the  companies,  and  it  soon  became 
apparent  that  the  problem  could  not  be  handled  by  corre- 
spondence alone.  With  a  view  of  arriving  at  a  full  under- 
standing of  the  situation,  and  of  calling  the  attention  of 
officials  of  the  telephone  companies  to  these  matters  of 
discrimination,  a  conference  of  telephone  companies  was 
thought  desirable.  Such  a  conference  was  held  at  Madison, 
March  24,  1908. 

Space  will  not  permit  of  a  detailed  discussion  of  the 
matters  brought  up  at  this  conference  or  of  the  findings 
of  the  Commission  in  the  case.  However,  a  brief  survey 
of  the  results  will  be  given.  Among  the  lax  procedures 
which  were  indulged  in  most  frequently  were  the  giving 
of  free  or  reduced  rate  service  to  railroads,  city  offices  and 
officers,  places  possessed  of  a  quasi-public  character,  such 
as  general  stores,  telegraph  offices,  opera  houses,  express 
offices,  electric  light  plants,  post  offices,  etc.,  and  indiscrim- 
inate free  service  at  competitive  points.  It  was  ascertained 
that  there  were  in  one  town  some  260,  in  another  250,  and 
in  another  53  telephones  being  maintained  entirely  free  of 
charge.  Cases  in  which  service  was  being  furnished  at  a 
reduced  rate  to  cities,  corporations  and  persons  were  nu- 
merous. The  reasons  given  by  the  companies  for  main- 
taining the  free  or  reduced  rate  service  were  various.  Some 
maintained  it  was  necessary  to  give  it  to  keep  the  business 
going;  others  frankly  admitted  that  it  was  maintained  for 
political  reasons. 

The  findings  of  the  Commission  in  this  case  pointed  out 
to  the  telephone  companies  wherein  their  various  dis- 
criminations were  in  contravention  of  the  law,  and  the 
order  in  the  case  gave  the  companies  a  reasonable  time  in 
which  to  correct  and  readjust  their  schedules  so  as  to  con- 
form to  the  law.1 

1  In  re  Free  and  Reduced  Bate  Telephone  Service,  Rendered  in  the. 
State  of   Wisconsin — being   an  investigation   by  the   Commission   on 


TELEPHONE  UTILITIES  195 

This  was  the  first  important  step  in  the  establishment 
of  uniform  practices  and  schedules  for  telephone  com- 
panies in  this  state.  The  next  step  made  by  the  Commis- 
sion looked  more  particularly  to  the  increasing  of  the 
efficiency  of  the  various  companies.  This  was  done  by 
urging  the  installation  of  up-to-date  systems  of  accounting 
and  by  making  suggestions,  and  sometimes  orders,  to  the 
companies,  relative  to  raising  their  standards  of  service. 
It  has  been  a  difficult  problem  to  convince  many  of  the 
utilities  of  the  necessity  of  accurate  accounting  practice, 
especially  the  smaller  companies.  However,  up  to  the  pres- 
ent time  many  sets  of  books  have  been  installed  by  the 
Commission,  and  the  satisfaction  shown  by  these  com- 
panies, when  the  systems  have  been  in  operation  for  a  time, 
is  one  indication  that  the  Commission's  work  along  this 
line  is  not  in  vain.  The  Commission 's  inspectors  have  been 
continually  making  tests  of  telephone  service  in  connection 
with  their  work  of  testing  the  service  of  gas,  electric  and 
water  utilities  throughout  the  state.  Many  letters  are  sent 
out  each  year  advising  companies  of  irregularities  in  serv- 
ice, and  in  most  cases  corrections  are  made  without  recourse 
to  formal  action.  Recently  this  Commission  has  adopted 
a  set  of  rules  for  telephone  service,  which  establish  certain 
standards  which  the  telephone  companies  of  the  state  are 
to  follow.1  These  rules,  while  forming  a  basis  upon 
which  to  make  corrections,  both  formally  and  informally, 
also  perform  the  very  good  office  of  tending  to  stand- 
ardize all  telephone  service  throughout  the  state.  In- 
asmuch as  the  chief  provisions  of  these  rules  have  al- 
ready  been   explained   in   a   previous   chapter   on    service 


its  own  motion,  1908,  2  W.  E.  C.  R.,  521-546.     Three  months'  time 
was  given  the  companies  to   conform  with  the  rules  promulgated. 

1  In  re  Investigation  on  Motion  of  the  Commission  of  Standards 
of  Telephone  Service  in  the  State  of  Wisconsin,  15  W.  R.  C.  R.,  No. 
U-339. 


196     RAILROADS  AND  PUBLIC  UTILITIES 

standards,  further  discussion  of  them  will  not  be  under- 
taken.1 

The  nature  and  extent  of  the  service  rendered  by  the 
telephone  companies  of  Wisconsin  appear  clearly  from  the 
following  table : 

Telephone  Utilities  of  Wisconsin,  Exchanges 
Doing  Both  Rural  and  Urban  Business  as  op  June  30,  1912 


Number  of 

exchange  systems 

Total 

number 

Total 
number 

Total 

number 

Serving 

Total 

of 

of 

of 

Serving 

Serving 

both 

urban 

rural 

phones 

rural 

urban 

rural 

phones 

phones 

only 

only 

and 
urban 

Classes     A, 

B.C&D. 

29 

228 

257 

135,845 

51,333 

187,178 

Wisconsin 

Telephone 

Company. 

12 

64 

76 

87,617 

7,104 

94,721 

Condensed. 

309 

309 

* 

27,217 

27,217 

Total. . .  . 

309 

41 

292 

642 

223,462 

85,654 

309,126 

* ' '  Condensed ' '    class   of   utilities    comprises   those   in    towns   of 
less  than  500  population. 


Out  of  a  total  of  642  telephone  exchanges  recorded  here 
only  41  do  a  strictly  urban  business.  In  other  words,  only 
6.38  per  cent  of  the  total  telephone  exchanges  recorded 
above  confine  their  operations  entirely  to  urban  communi- 
ties and  92.62  per  cent  extend  their  operations  beyond  these 
limits.  Considering  the  business  done  we  find  that  in 
classes  A,  B,  C  and  D  exchanges,  the  division  on  the  per- 
centage basis  is  73  urban  and  27  rural.  For  the  Wisconsin 
Telephone  Company,  as  shown  in  the  table,  93  per  cent  of 
the  telephones  are  urban  and  7  per  cent  are  rural,  while 

1  See  Ch.  V.  on  "Standardization  of  Service." 


TELEPHONE  UTILITIES  197 

for  the  condensed  systems  practically  all  of  the  business 
done  is  rural.  These  conditions  are  not  representative  of 
Wisconsin  alone,  but  rather  are  illustrative  of  the  telephone 
business  for  all  other  states  in  general. 

The  principles  involved  in  the  determination  of  tele- 
phone rates  have  not  been  as  fully  developed  by  the  Com- 
mission as  in  the  case  of  other  classes  of  utilities.  The 
majority  of  telephone  rate  cases  which  that  body  has 
handled  have  been  applications  by  the  smaller  utilities 
for  authority  to  increase  rates.  Many  of  these  companies 
grew  out  of  small  mutual  or  semi-mutual  companies  whose 
existing  rates  had  been  fixed  under  conditions  of  opera- 
tion entirely  different  from  those  encountered  in  furnish- 
ing modern  telephone  service.  In  practically  none  of  these 
cases  had  the  utility,  in  fixing  its  original  schedule,  taken 
cognizance  of  the  existence  of  depreciation  as  an  element 
which  must  be  finally  encountered. 

This,  together  with  the  cost  of  furnishing  an  improved 
grade  of  service,  made  the  old  rates  inadequate,  and  an 
increase  imperative,  if  satisfactory  service  were  to  continue. 

In  these  cases,  however,  apportionments  of  expense,  to 
the  degree  necessitated  in  the  electric  rate  cases,  was  not 
found  necessary  and  was  generally  impractical,  because  the 
utilities  did  not  possess  the  data  requisite  for  such  an 
apportionment.  In  certain  other  cases,  however,  appor- 
tionments have  been  necessary.  Many  telephone  com- 
panies operating  in  Wisconsin  cities  do  switching  work 
for  rural  lines  which  are  built  into  the  cities.  In  these 
cases  very  careful  traffic  studies  have  been  necessary  in 
order  to  enable  the  Commission  to  determine  what  propor- 
tion of  the  costs  of  running  the  business  should  be  charged 
to  the  foreign  lines.1 

The  Commission  has  taken  the  stand  that  each  class  of 

1  Application  of  Farmers'  Telephone  Co.  of  Beetown  to  Increase 
Bates,  13  W.  R.  C.  R.,  540-559. 


198     RAILROADS  AND  PUBLIC  UTILITIES 

service  should,  as  far  as  possible,  bear  its  own  costs.  To 
this  end,  the  Commission  has  extended  the  use  of  message 
rates  on  toll  business  where  flat  rates  formerly  prevailed, 
although  the  message  rate  basis  is  by  no  means  exclusively 
used  as  yet. 

With  the  development  of  devices  for  recording  the  num- 
ber of  messages,  as  an  electric  meter  records  the  use  of 
electric  current,  the  use  of  the  measured  service  basis  of 
charging  for  telephone  service  is  becoming  much  broader. 
The  extension  of  the  principle  that  each  user  should  pay 
for  the  service  he  receives  and  not  be  burdened  with 
the  cost  incurred  by  other  users,  who  may  or  may  not  be 
careful  in  their  use  of  the  service,  makes  the  use  of  the 
meter  rates  a  logical  development  in  the  telephone  in- 
dustry. 

The  difficult  questions  of  division  of  costs  among  the 
many  classes  of  telephone  service,  of  determining  the  fixed 
and  variable  costs,  and  of  deciding  how  these  should  be 
met,  have  not  been  fully  worked  out,  but  from  the  way  in 
which  the  Commission  has  handled  cases  of  other  utilities, 
there  can  be  no  question  that  one  of  the  tasks  before  it 
will  be  the  formulation  of  scientifically  adjusted  rates. 

The  essential  equipment  of  a  telephone  plant  falls  into 
three  divisions.  There  must  be  a  central  office,  a  wire 
plant  and  equipment  on  subscriber's  premises.  Naturally 
operations  involved  in  furnishing  service  group  themselves 
under  these  three  divisions.  When  service  is  furnished  it 
becomes  necessary  to  have  a  means  of  handling  subscribers' 
accounts  and  of  securing  collection  of  bills.  This  forms  a 
group  of  commercial  expenses  which  is  distinct  in  charac- 
ter from  the  expenses  which  are  involved  in  administering 
the  business  as  carried  on  in  the  central  office,  the  wire 
plant,  the  substation  and  the  commercial  departments  and 
which  latter  expense  may  be  classified  as  administrative  or 
general.     Undistributed  expenses  include  those  which  are 


TELEPHONE  UTILITIES  199 

of  a  general  nature  but  are  not  incurred  for  an  adminis- 
trative purpose. 

The  above  primary  groupings  appear  to  coincide  with 
the  primary  characteristics  of  the  utility  and  it  must  follow- 
that  where  accounts  are  thus  classified,  depicting  the  cost 
of  each  process,  both  the  utility  and  the  Commission  are 
able  to  relate  reported  expenses  directly  and  unquestion- 
ably to  the  part  of  the  business  which  brought  them  into 
existence.  For  the  purpose  of  a  body  which  is  seeking 
to  carry  out  a  policy  of  basing  rates  on  costs,  the  same 
information  is  needed  as  for  the  cost  accountant  who  seeks 
to  know  the  efficiency  of  each  department  of  the  business. 

PHYSICAL  CONNECTION  LAW 

In  1911  the  Public  Utility  Law  was  amended  provid- 
ing for  physical  connection  between  telephone  companies. 
The  statute  as  amended  reads  1  as  follows : 

1.  .  .  .  every  utility  for  the  conveyance  of  telephone  mes- 
sages shall  permit  a  physical  connection  or  connections  to  be 
made,  and  telephone  service  to  be  furnished,  between  any  tele- 
phone system  operated  by  it,  and  the  telephone  toll  line  operated 
by  another  such  public  utility,  or  between  its  toll  line  and  the 
telephone  system  of  another  such  public  utility,  or  between  its 
toll  line  and  the  toll  line  of  another  such  public  utility,  or  be- 
tween its  telephone  system  and  the  telephone  system  of  another 
such  public  utility,  whenever  public  convenience  and  necessity 
require  such  physical  connection  or  connections,  and  such  phys- 
ical connection  or  connections  will  not  result  in  irreparable  in- 
jury to  the  owners  or  other  users  of  the  facilities  of  such  public 
utilities,  nor  in  any  substantial  detriment  to  the  service  to  be 
rendered  by  such  public  utilities.  The  term  "physical  connec- 
tion," as  used  in  this  section,  shall  mean  such  number  of  trunk 
lines  or  complete  wire  circuits  and  connections  as  may  be  required 

1  Sec.  1797m-4  Eevised  Statutes  of  1913. 


200     BAILROADS  AND  PUBLIC  UTILITIES 

to  furnish  reasonably  adequate  telephone  service  between  such 
public  utilities. 

2.  In  case  of  failure  to  agree  upon  such  use  or  the  conditions 
or  compensation  for  such  use,  or  in  case  of  failure  to  agree  upon 
such  physical  connection  or  connections,  or  the  terms  and  condi- 
tions upon  which  the  same  shall  be  made,  any  public  utility  or 
any  person,  association  or  corporation  interested  may  apply  to 
the  commission,  and  if  after  investigation  the  commission  shall 
ascertain  that  public  convenience  and  necessity  require  such  use 
or  such  physical  connection  or  connections,  and  that  such  use  or 
such  physical  connection  or  connections  would  not  result  in  irrep- 
arable injury  to  the  owner  or  other  users  of  such  equipment 
or  of  the  facilities  of  such  public  utilities,  nor  in  any  substan- 
tial detriment  to  the  service  to  be  rendered  by  such  owner  or  such 
public  utilities  or  other  users  of  such  equipment  or  facilities,  it 
shall  by  order  direct  that  such  use  be  permitted  and  prescribe 
reasonable  conditions  and  compensation  for  such  joint  use,  and 
that  such  physical  connection  or  connections  be  made,  and  deter- 
mine how  and  within  what  time  such  connection  or  connections 
shall  be  made,  and  by  whom  the  expense  of  making  and  main- 
taining such  connection  or  connections  shall  be  paid. 

3.  Such  use  so  ordered  shall  be  permitted  and  such  physical 
connection  or  connections  so  ordered  shall  be  made,  and  such 
conditions  and  compensation  so  prescribed  for  such  use  and  such 
terms  and  conditions,  upon  which  such  physical  connection  or 
connections  shall  be  made,  so  determined,  shall  be  the  lawful  con- 
ditions and  compensation  for  such  use,  and  the  lawful  terms  and 
conditions  upon  which  such  physical  connection  or  connections 
shall  be  made,  to  be  observed,  followed  and  paid,  subject  to  re- 
course to  the  courts  upon  the  complaint  of  any  interested  party, 
as  provided  in  sections  1797m-64  to  1797m-73,  inclusive,  and  such 
section  so  far  as  applicable  shall  apply  to  any  action  arising  on 
such  complaint  so  made.  Any  such  order  of  the  commission  may 
be  from  time  to  time  revised  by  the  commission  upon  application 
of  any  interested  party  or  upon  its  own  motion. 

Two  important  cases  and  a  number  of  smaller  ones  have 
arisen  under  this  statute  since  its  enactment.    The  first  was 


TELEPHONE  UTILITIES  201 

that  of  Frank  Winter  v.  La  Crosse  Telephone  Company 
and  Wisconsin  Telephone  Company,  decided  May  14,  1913.1 
This  was  an  action  to  compel  the  La  Crosse  Telephone 
Company  and  the  Wisconsin  Telephone  Company  to  con- 
nect their  La  Crosse  exchanges  for  toll  purposes.  The 
Commission  held  in  the  case  that  the  public  convenience 
and  necessity  required  the  connection ;  that  with  a  proper 
extra  toll  charge  on  calls  between  the  two  exchanges  no 
irreparable  injury  would  be  done  to  the  owners  or  users 
of  the  facilities  of  the  companies  and  that  no  substantial 
detriment  to  the  service  of  either  company  would  result 
from  the  connection.  The  connection  was  therefore  or- 
dered, the  duty  devolving  upon  the  companies  to  agree 
upon  the  terms  and  manner  of  making  the  connection. 
The  companies,  however,  could  not  agree  upon  either  terms 
or  manner  of  connection  so  the  Commission  was  again 
called  upon,  as  is  provided  in  the  law,  to  make  its  adjust- 
ments, which  it  did  in  a  supplemental  order  dated  August 
20,  1914. 

The  second  important  case  arose  in  Janesville  where 
E.  D.  McGowan  instituted  proceedings  before  the  Commis- 
sion to  compel  physical  connection  of  local  as  well  as  toll 
connections  between  the  Rock  County  Telephone  Company 
and  the  Wisconsin  Telephone  Company.2  The  order  was 
dated  June  3,  1914.  Since  then  the  companies  have  agreed 
upon  the  terms  of  the  connection,  but  this  phase  of  the 
situation  came  before  the  Commission  for  adjustment.  Sev- 
eral other  cases  have  been  brought  before  the  Commission, 
in  most  of  which  orders  have  been  made  establishing  the 
connection  of  the  lines.     The  physical  connection  law  ap- 

1  Frank  Winter  v.  La  Crosse  Tel.  Co.  et  al.,  1913,  11  W.  E.  C.  E., 
748;  supplemental  order  in  same  case,  1914,  15  W.  E.  C.  E.,  36.  See 
also,  A.  E.  Monroe  et  al.  v.  Clinton  Tel.  Co.  et  al,  1912,  10  W.  E.  C. 
E.,  598. 

ZE.  D.  McGowan  v.  Bock  County  Tel.  Co.  et  al.,  1914,  14  W.  E.  C. 
E.,  529. 


202     RAILROADS  AND  PUBLIC  UTILITIES 

pears  to  be  working  out  satisfactorily.  It  is  accomplishing 
a  greater  flexibility  in  the  telephone  business  with  the  re- 
sulting increase  in  the  value  of  the  service  to  the  sub- 
scriber. 

ANTI-DUPLICATION    LAW 

In  1913  the  laws  affecting  the  regulation  of  public 
utilities  were  amended  to  the  end  that,  in  the  future,  need- 
less duplication  of  telephone  systems  in  the  rural  districts, 
as  well  as  in  the  cities  and  villages,  may  be  avoided.  Since 
1911  cities  and  incorporated  villages  have  been  protected 
from  duplication  of  lines  by  an  amendment  to  the  Public 
Utility  Law,1  a  part  of  which  is  as  follows : 

...  no  telephone  exchange  for  furnishing  local  service  to 
subscribers  within  any  village  or  city  shall  be  installed  in  such 
village  or  city  by  any  public  utility,  other  than  those  already 
furnishing  such  telephone  service  therein,  when  there  is  in  opera- 
tion in  such  village  or  city  a  public  utility  engaged  in  a  similar 
service,  without  first  securing  from  the  commission  a  declaration 
after  a  public  hearing  of  all  parties  interested  that  public  con- 
venience and  necessity  require  such  second  public  utility.   .    .    . 

As  stated  above,  a  further  amendment  extended  the 
scope  of  this  provision  in  1913  so  as  to  include  towns,  as 
well  as  cities  and  villages.  This  latter  amendment 2  in 
part  is  as  follows: 

No  public  utility  already  engaged  in  furnishing  telephone  ser- 
vice shall  instal  or  extend  any  telephone  exchange  for  furnishing 
local  service  to  subscribers  hi  any  municipality  where  there  is  in 
operation  a  public  utility  engaged  in  similar  service,  without  first 
having  served  notice  in  writing  upon  the  commission  and  any 
other  public  utility  already  engaged  in  furnishing  local  service 
to  subscribers  in  such  municipality  of  the  installation  or  exten- 

1  1797m-74  (Ch.  546,  Laws  of  1911)  Kevised  Statutes,  1913. 
2Ch.  610,  Laws  of  1913. 


TELEPHONE  UTILITIES  203 

sion  of  such  exchange  which  it  proposes  to  make,  or  make  such 
installations  or  extensions  if  the  commission,  within  twenty  days 
after  the  service  of  such  notice,  shall,  upon  investigation,  find 
and  declare  that  public  convenience  and  necessity  do  not  require 
the  installation  or  extensions  of  such  exchange,  except  that  any 
public  utility  already  engaged  in  furnishing  local  service  to  sub- 
scribers within  any  city  or  village  may  extend  its  exchange  within 
such  city  or  village  without  the  authority  of  the  commission. 

It  will  be  noted  from  the  above  law  that  when  proper 
notices  have  been  given,  unless  the  opposing  company  pro- 
tests and  the  Commission  makes  an  investigation  and  rules 
against  the  proposed  extension  or  installation  within  twenty 
days,  the  company  proposing  the  extension  may  proceed 
with  its  construction.  This  provision  insures  that  legiti- 
mate construction  will  not  be  postponed  for  an  unreason- 
able period  and  at  the  same  time  gives  sufficient  time  in 
which  to  investigate  the  necessity  of  the  proposed  exten- 
sion. 

Many  petitions  have  arisen  under  this  law.  In  grant- 
ing an  application  to  Michael  T.  Gehl  of  the  town  of 
Addison,  Washington  County,  to  build  a  telephone  line, 
the  Commission  gave  an  interpretation  x  of  the  anti-dupli- 
cation law  which  may  have  a  far-reaching  effect  on  some 
of  the  smaller  telephone  lines  of  the  state.  The  decision 
affects  border  territory  either  side  of  which  line  is  served 
by  a  different  company.  The  question  arose  whether  the 
Commission  should  deny  the  application  under  these  cir- 
cumstances involving  the  anti-duplication  law.  The  Com- 
mission ruled  thus: 

In  border  territory,  like  that  involved  in  this  case,  there  is 
sometimes  presented  a  situation  where  some  overlapping  of  tele- 

1  In  re  Construction  of  Telephone  line  in  Town  of  Addison,  Wash- 
ington County,  1914,  14  W.  E.  C.  E.,  766.  Also  see  In  re  Violation 
of  Law,  Lisbon  Telephone  Co.,  1914,  14  W.  E.  C.  E.,  131. 


204     RAILROADS  AND  PUBLIC  UTILITIES 

phone  lines  is  required  in  order  that  public  convenience  and  ne- 
cessity with  regard  to  telephone  service  may  be  fully  satisfied. 
While  such  overlapping  may  at  times  do  some  injury  to  one  of  the 
companies,  and  the  general  policy  of  the  law  is  usually  against 
the  duplication  of  lines  which  will  impair  investment,  still  it  is 
also  true  that  the  convenience  and  necessity  of  the  public  itself 
in  the  matter  of  telephone  service  is  the  paramount  consideration. 
Again  where  the  public  need  can  only  be  satisfied  by  permitting 
a  certain  amount  of  overlapping,  the  doctrine  of  protection  for 
existing  interests  cannot  be  carried  to  its  full  length. 

Strife  among  telephone  companies  in  rural  territory 
with  its  accompanying  wasteful  duplication  of  lines  has 
been  common  in  this  state  and  a  law  of  this  nature  fills  a 
much-needed  want  in  this  respect.  It  is  very  common 
for  individuals  or  groups  of  individuals  in  rural  communi- 
ties to  arrive  at  the  conclusion  that  a  telephone  line  can 
be  operated  and  maintained  for  a  small  amount — often  as 
low  as  two,  three  or  four  dollars  per  year  per  station. 
Hence  they  reason  that  the  company  to  which  they  are 
already  connected,  which  perhaps  is  charging  them  twelve 
or  fifteen  dollars  per  year,  is  robbing  them.  They  pro- 
ceed to  build  a  line  of  their  OAvn  paralleling  the  existing 
company's  line,  and  also  throw  out  the  existing  company's 
phones.  The  immediate  result  for  the  company,  aside  from 
the  loss  due  to  the  investment  in  construction,  is  a  loss  of 
available  connections  to  the  remainder  of  its  subscribers. 
The  ultimate  result  usually  is  that  the  rural  line  costs  its 
owners  much  more  than  they  originally  figured  on.  No 
allowance  is  usually  made  in  their  computations  for  the 
fact  that  the  line  which  they  construct  will  last  but  a  few 
years  and  then  have  to  be  replaced.  Generally  no  annual 
depreciation  charge  is  considered.  When  proper  allow- 
ances are  made  for  this  factor,  and  for  the  time  they 
donate  in  building  the  line,  the  rate  which  is  arrived 
at  will  probably  be  much  higher  than  it  was  originally 


TELEPHONE  UTILITIES  205 

figured  and  perhaps  not  far  from  the  rate  which  the  old 
company  was  charging.  It  must  not  be  considered  that  this 
is  a  defense  of  any  company's  existing  rate.  An  effort 
has  been  made  mainly  to  point  out  wherein  many  of  the 
small  companies  make  errors  when  endeavoring  to  furnish 
telephone  service.  It  should  be  remembered  that  if  rates 
of  the  existing  company  are  too  high  or  service  is  poor, 
adequate  recourse  may  be  had  through  an  appeal  to  the 
Commission,  upon  which  an  investigation  will  be  made  and 
the  proper  rates  or  service  established. 

The  object  of  the  anti-duplication  law  is  to  avoid  such 
wasteful  duplication  as  outlined  above.  Since  the  adoption 
of  the  law  in  1913,  there  have  been  up  to  September  1, 
1914,  two  hundred  and  four  cases  before  the  Commission 
under  this  heading.  These  cases  have  sometimes  resulted 
in  formal  proceedings  relative  to  the  service  and  rates 
of  existing  companies.  Many  miles  of  wasteful  duplication 
of  lines  have  been  avoided  and  in  general  the  operation  of 
the  law  appears  to  be  accomplishing  the  desired  results. 


CHAPTER  XIV 

WATER  UTILITIES 

A  feature  of  the  Wisconsin  Public  Utility  Law  which 
has  caused  a  great  deal  of  comment,  both  favorable  and 
adverse,  is  that  both  privately  and  municipally  owned 
utilities  are  subject  to  the  same  degree  of  regulation.  In 
some  of  the  more  recent  utility  laws,  notably  that  of  Illi- 
nois, the  municipal  plants  have  been  exempted.  The  rea- 
sons for  the  inclusion  of  city  owned  plants  in  Wisconsin 
are  apparent  when  the  purposes  which  the  law  was  aimed 
to  accomplish  and  some  of  the  results  which  have  been 
obtained  as  a  result  of  its  administration,  are  considered. 

Foremost  in  the  minds  of  the  framers  of  the  law  was 
probably  the  idea  that  the  rates  of  public  utilities  should 
not  be  excessive,  but  the  restriction  of  the  total  revenues 
of  public  utilities  to  a  reasonable  amount  was  by  no  means 
the  sole  purpose  in  view.  Very  few  publicly  owned  plants 
have  been  conducted  as  profit-making  businesses.  Some  of 
them  have,  of  course,  shown  a  profit,  but  the  purpose  of 
their  operation  has  not  generally  been  to  yield  a  profit. 
From  this,  it  might  be  argued  that  state  regulation  of 
municipal  plants  is  unnecessary.  Restriction  of  total  profits 
of  utilities,  important  as  it  is,  is  only  a  small  segment  of 
the  field  of  regulation.  Total  revenues  may  be  reasonable 
beyond  any  question,  and  rates  still  be  unreasonable  be- 
cause of  discriminations  between  classes,  as  will  be  more 
fully  explained  at  a  later  point  in  this  chapter.  Rates  in 
order  to  be  reasonable  must  be  predicated  on  reasonable 

206 


WATER  UTILITIES  207 

service ;  or  rates  may,  in  fact,  be  reasonable,  but  accounts 
kept  in  such  poor  shape  that  the  reasonableness  of  the 
charges  cannot  be  proved.  Municipally  owned  plants  are 
as  likely  to  indulge  in  discriminatory  practices  as  private 
plants.  This  does  not  necessarily  mean  practices  which  are 
wilfully  wrong.  While  the  community  would  be  on  guard 
against  improper  practices  of  a  privately  owned  utility, 
the  municipal  plant  being  part  and  parcel  of  the  city,  the 
attitude  of  watchful  criticism  on  the  part  of  members  of 
the  community  is  often  missing.  Except  where  the  city's 
plant  has  been  drawn  into  the  turmoil  of  local  politics,  its 
practices  are  not  subject  to  the  public  disapproval  which 
falls,  justly  or  unjustly,  upon  the  private  utility.  When 
the  conduct  of  the  city's  utility  business  is  made  the  issue 
around  which  local  campaigns  are  fought,  the  business 
function  of  the  utility  is  often  lost  sight  of,  and  the  steady- 
ing influence  of  a  state  commission  is  badly  needed.  When 
politics  determine  utility  policies  the  minority  have  no 
means  of  redress,  except  it  be  through  their  right  to  call 
upon  the  state  to  enforce  practices  which  are  reasonable. 

Municipal  plants,  under  the  Wisconsin  law,  are  subject 
to  the  same  restrictions  as  are  privately  owned  utilities, 
but  the  work  of  the  Railroad  Commission,  especially  as 
related  to  municipal  utilities,  is  not  entirely,  nor  even 
primarily,  restrictive. 

In  some  cases  cities  have  voluntarily  entered  the  utility 
business  by  purchasing  the  property  of  private  companies, 
but  in  probably  a  majority  of  the  cases,  especially  in  the 
smaller  cities,  the  municipalities  have  been  practically 
forced  into  the  utility  business  by  the  public  demand  for 
utility  service  in  localities  which  were  not  sufficiently  de- 
veloped to  attract  private  capital.  Necessarily,  the  smaller 
cities  have  engaged  in  utility  enterprises  without  much 
knowledge  of  the  nature  and  requirements  of  the  business. 
For   these   cities   and   villages  the   Railroad    Commission 


208     RAILROADS  AND  PUBLIC  UTILITIES 

performs  the  functions  of  a  consulting  board.  A  great 
part  of  the  work  which  the  Commission  has  done  in  con- 
nection with  the  municipal  plants  has  been  undertaken  at 
the  request  of  the  municipal  authorities.  Accounting  sys- 
tems have  been  devised  and  installed ;  rate  schedules  have 
been  recommended;  advice  has  been  given  on  methods  of 
securing  plant  efficiency,  and  a  great  deal  of  adminis- 
trative and  engineering  aid  has  been  furnished  to  the  city 
plants. 

More  than  any  other  class  of  utility,  the  public  water 
supplies  of  Wisconsin  are  owned  and  operated  by  the  cities 
and  villages.  "What  has  been  said  with  regard  to  the  rela- 
tions of  the  Commission  to  municipal  plants,  therefore, 
holds  true  of  the  water-supply  business  to  a  greater  extent 
than  of  any  other  utility  undertaking.  At  the  present  time 
the  records  of  the  Commission  show  that  there  are  only 
twenty-five  privately  owned  water  plants  in  the  state,  and 
several  of  these  are  about  to  be  transferred  to  the  public 
authorities.  For  the  year  ending  June  30,  1913,  one 
hundred  and  thirty-seven  municipally  owned  and  twenty- 
four  private  plants  reported  to  the  Commission.  A  num- 
ber of  small  municipal  plants  have  been  added  within  the 
past  year.  A  better  idea  of  the  extent  to  which  municipal 
ownership  of  water  supplies  has  gone  can  probably  be 
gained  from  a  statement  of  the  value  of  the  property  owned 
by  cities  and  by  private  parties. 

Class  A  includes  utilities  in  cities  of  over  10,000  in- 
habitants ;  Class  B,  those  in  cities  of  from  3,000  to  10,000 ; 
Class  C,  those  in  cities  of  about  1,800  to  about  3,000 ;  Class 
D  has  a  lower  limit  of  about  800,  and  Class  E  includes 
the  very  small  utilities. 

The  assistance  which  the  Commission  gives  to  the  muni- 
cipally owned  utilities  is  outlined  rather  fully  in  another 
chapter.  With  the  conditions  regarding  the  ownership  of 
water  plants  in  mind  we  may  turn  our  attention  to  some 


WATER  UTILITIES 


209 


of  the  purposes  and  results  of  their  control  by  the  Rail- 
road Commission. 

As  in  utility  regulation,  usually  the  attention  of  the 
Commission  has  been  directed  to  the  two  questions  of  rates 
and  service.  Probably  less  has  been  done  throughout  the 
country  generally  to  put  the  rates  of  water  utilities  upon 

Table   Showing   Number   and   Book   Value   of   Municipal   and 
Private  Water  Utilities — by  Classes 


Municipal 

Private 

Class 

Number 

Value 

Number 

Value 

A 

12 
36 
20 

22 
47 

$11,883,120.97 

2,968,346.32 

747,614.14 

425,555 .  40 

729,707.97 

10 

8 
2 
2 
2 

$7,641,883.24 

B.             

1,559,190.92 

C 

433,258.68 

D 

27,469.00 

E 

11,500.00 

Total 

137 

$16,754,344.80 

24 

$9,673,301.84 

an  equitable  and  reasonable  basis  than  in  any  other  line 
of  utility  operations. 

With  the  passage  of  the  Public  Utility  Law  there  was  a 
rather  general  belief  that  rates  of  all  classes  of  utilities 
would  undergo  sweeping  reductions.  The  public  knew 
little  of  the  actual  extent  to  which  charges  of  utilities  were 
unreasonable  and  extortionate  but  there  was  a  feeling,  well 
founded  in  many  cases,  that  the  utility  business  was  yield- 
ing profits  beyond  a  reasonable  return.  What  the  condi- 
tions were  in  the  water-works  business  the  public  did  not 
know.  The  period  from  1885  to  1890  was  the  boom  period 
in  water-works  construction  in  Wisconsin.  A  large  number 
of  plants  were  constructed  by  private  capital  during  these 
years.  After  a  period  of  nearly  twenty  years  in  which  the 
business  was  being  developed,  it  was  perhaps  natural  that 


210     RAILROADS  AND  BUBLIC  UTILITIES 

there  should  be  a  general  feeling  that  the  water  utilities 
must  be  tremendously  and  unreasonably  profitable.  Those 
who  saw  in  the  utilities  law  the  instrument  for  radically 
reducing  the  earnings  and  charges  of  water-supply  plants 
have  failed,  in  large  measure,  to  have  their  expectations 
realized.  Actual  study  of  water  utility  operations  and 
finances  shows  that,  except  in  a  number  of  individual  cases, 
the  public  water-supply  business  has  not  been  excessively 
profitable  in  Wisconsin.  Some  plants  have  shown  large 
earnings  but  this  has  not  been  characteristic  of  the  in- 
dustry. 

The  causes  of  this  condition  are  various,  but  there  are 
a  few  which  have  been  so  generally  present  that  it  may 
be  well  to  mention  them.  Perhaps  the  foremost  of  these 
causes  is  the  failure  of  the  municipalities  to  pay  the  full 
cost  of  fire  protection.  Where  the  water  plants  are  muni- 
cipally owned  and  operated  there  has  been  a  more  or  less 
general  failure  to  recognize  the  fact  that  the  furnishing  of 
fire  protection  costs  money  and  that  the  city  itself  should 
meet  this  cost.  Even  where  the  plants  have  been  privately 
owned  the  fire  protection  has  usually  been  furnished  at  far 
less  than  cost.  The  fire  protection  rate  has  been  the  result 
of  bargaining  between  the  city  authorities  and  the  com- 
pany. The  result  has  been  a  rate  for  this  service,  less 
than  the  actual  cost  of  supplying  the  service.  With  the 
rate  for  fire  protection  fixed  at  less  than  cost,  the  private 
consumers  must  pay  more  than  their  proper  share  of  the 
utility's  expenses  or  the  business  must  be  conducted  at  a 
loss.  Because  of  the  fact  that  cities  have  not  paid  their 
share  of  the  expenses  of  conducting  the  water  business, 
general  reductions  in  rates  to  private  consumers  have  often 
been  impossible,  unless  the  charge  for  fire  protection  were 
raised  to  its  proper  level. 

Before  attempting  an  explanation  of  the  principles 
applied  by  the  Wisconsin  Commission  in  adjusting  water 


WATER  UTILITIES  211 

rates,  it  may  be  well  to  touch  upon  the  various  types  of 
schedules  which  the  Commission  has  found  in  Wisconsin.1 
Of  the  large  number  of  water  utilities  operating  in  Wis- 
consin practically  every  one,  if  not  every  one,  furnishes 
some  degree  of  fire  protection.  In  almost  every  case  the 
rates  which  have  been  in  effect  for  fire  protection  related 
in  some  manner  to  the  extent  of  the  distribution  system 
rather  than  to  the  actual  extent  of  the  protection  which 
the  utility  has  been  in  a  position  to  furnish.  For  example, 
we  have  in  one  city  a  schedule  which  provides  that  the 
charges  for  fire  protection  shall  be  $40.00  per  hydrant  per 
year,  regardless  of  the  number  of  hydrants  installed.  In 
another  city  the  charge  is  $100.00  for  each  of  the  first  fifty- 
four  hydrants,  which  apparently  are  set  upon  the  original 
distribution  system,  $60.00  for  each  of  the  next  forty 
hydrants,  and  $50.00  for  each  additional  hydrant.  Still 
another  class  of  charges  for  fire  protection  is  exemplified 
by  a  schedule  in  force  in  this  state  which  provides  for  a 
charge  of  $400.00  per  mile  of  main  per  year. 

The  disadvantages  of  a  charge  based  upon  the  extent 
of  the  distribution  system  or  upon  the  number  of  hydrants 
must  be  obvious.  In  order  to  furnish  adequate  fire  pro- 
tection, a  water  plant  must  have  a  plentiful  source  of  sup- 
ply, it  must  have  sufficiently  powerful  pumping  machinery, 
it  must  have  distribution  mains  sufficient  in  extent  to 
enable  it  to  deliver  water  to  any  point  where  there  is  a  fire 
risk,  and  its  distribution  system  must  be  sufficiently  well 
equipped  with  hydrants  so  that  the  water  can  be  used 
most  advantageously.2 

When  the  rate  for  fire  protection  is  based  upon  the 

1  See  Ch.  X,  for  methods  of  rate-making  or  water  utilities  and 
citation  of  leading  cases. 

2  In  the  preparation  of  this  chapter  reference  has  been  had  to  an 
address  by  Mr.  Erickson,  supra,  before  the  American  Water  Works 
Association,  and  to  an  unpublished  report  by  the  Statistical  Depart- 
ment. 


212     RAILROADS  AND  PUBLIC  UTILITIES 

number  of  hydrants  in  use,  the  inevitable  tendency  on 
the  part  of  those  paying  for  fire  protection  will  be  to 
restrict  the  number  of  hydrants.  Hydrants  will  be  placed 
too  far  apart,  or  if  the  franchise  requirements  state  that 
hydrants  shall  be  placed  at  specified  intervals  upon  the 
distributive  system,  the  tendency  will  be  to  restrict  the 
development  of  the  distribution  system  itself. 

In  the  same  way,  when  the  charge  for  fire  protection 
is  based  upon  the  number  of  miles  of  main  installed,  the 
tendency  will  almost  inevitably  be  to  limit  the  extent  of 
the  distribution  system,  which  in  turn  will  decrease  its 
efficiency  as  a  protection  against  fire,  and  in  the  cases  of 
water  plants  supplying  both  fire  protection  and  general 
service  will  lessen  the  value  of  the  distribution  system  as  a 
means  of  supplying  general  consumers.  At  a  later  point 
in  this  discussion  we  will  take  up  further  the  argument 
that  the  fire  protection  should  be  considered  as  a  unit  for 
purposes  of  charging  for  the  service. 

There  are  a  few  cities  in  Wisconsin,  especially  those 
where  the  Commission  has  reviewed  the  water  rates,  in 
which  these  conditions  have  been  remedied.  The  proper 
schedule  would  provide,  for  instance,  for  a  charge  of  a 
lump  sum  for  existing  fire  protection,  which  was  designed 
to  cover  all  the  costs  connected  with  furnishing  such  pro- 
tection, and  for  such  additional  charges  as  should  be  made 
because  of  extension  of  the  distribution  system.  These 
additional  charges  are  such  as  are  warranted  by  the  cost 
of  extending  the  service  and  are  designed  not  to  unduly 
restrict  the  extension  of  service. 

Aside  from  the  fire  protection  which  the  water  utility 
furnishes,  the  great  majority  of  water  plants  supply  water 
for  general  purposes  which  for  the  sake  of  convenience 
may  be  divided  into  three  classes:  first,  that  which  is  sup- 
plied through  meters;  second,  that  which  is  supplied  to 
domestic  and  industrial  users  upon  the  basis  of  the  number 


WATER  UTILITIES  213 

of  fixtures  and  the  character  of  the  premises  supplied ; 
and  third,  that  which  is  supplied  for  incidental  purposes 
such  as  street  sprinkling.  Taking  up  the  last  of  these 
three,  we  find  a  number  of  types  of  schedules  in  use  in 
Wisconsin,  some  of  which  are  illustrated  here.  In  one  city 
a  charge  is  made  of  six  dollars  per  month  for  each  sprin- 
kling wagon.  In  another  the  charge  is  six  dollars  per 
wagon  per  season.  That  is,  in  both  of  these  cases,  the 
wagon  per  month  or  wagon  per  season  is  considered  as  a 
unit  for  purposes  of  charging.  In  other  cases  all  street 
sprinkling  is  paid  for  in  a  lump  sum  per  year.  In  still 
other  cases  a  charge  is  made  per  front  foot  of  abutting 
property  or  per  mile  of  street  per  season,  and  in  a  few 
instances  the  water  is  actually  metered  and  charged  for 
on  a  meter  basis. 

No  attempt  can  be  made  at  this  point  to  review  all  the 
types  of  flat  rate  schedules  which  are  in  use  at  the  present 
time.  In  a  general  way  it  may  be  said  that  the  charges 
which  are  made  upon  a  flat  rate  basis  relate,  first,  to  the 
character  of  premises  supplied ;  second,  to  the  number  of 
fixtures  through  which  water  may  be  taken  at  those  prem- 
ises, and  third,  to  various  other  elements  such  as  the  num- 
ber of  rooms  or  the  number  of  persons  supplied  from  the 
service  in  question.  Wherever  the  water  business  is  at  all 
developed  the  flat  rate  schedules  are  unwieldy  and  poorly 
adapted  to  such  uses  of  water  as  are  not  easily  classified. 
The  first  result  of  this  has  been  that  in  almost  every  flat 
rate  schedule  existing  in  any  large  city  there  have  sprung 
up  a  number  of  special  rates  which  are  very  often  dis- 
criminatory. But  even  where  special  rates  do  not  exist 
the  flat  rates  in  themselves  are  almost  inevitably  discrimi- 
natory. 

If  there  is  any  theory  aside  from  getting  all  that  the 
service  will  bear,  upon  which  flat  rate  schedules  are  based, 
it  must  be  that  for  each  class  of  premises  and  fixtures 


214     RAILROADS  AND  PUBLIC  UTILITIES 

there  is  a  normal  and  reasonable  nse  of  water  which  can 
be  approximated  with  some  degree  of  accuracy  and  charged 
for  without  actual  measurement.  It  is  apparent,  of  course, 
that  this  is  true  only  in  a  very  general  way,  and  to  a  limited 
extent,  but  even  if  it  is  true  that  there  is  a  normal  and 
reasonable  use  of  water  which  can  be  determined  without 
actual  measurement  and  charged  for,  the  difficulty  with 
the  flat  rate  schedule  comes  right  at  this  point.  The  con- 
sumer who  is  wasteful  in  his  use  of  water  and  who  uses 
more  than  a  normal  and  reasonable  amount  is  causing  an 
expense  to  the  utility  which  is  being  borne  by  consumer;; 
who  are  careful  in  their  use  of  water  and  who  are  not 
causing  any  waste.  "When  a  utility  sells  water  through  a 
kitchen  faucet,  for  example,  to  a  residence  of  five  rooms, 
it  really  sells  a  quantity  of  water,  which  quantity  is  not 
the  maximum  amount  which  can  be  drawn  through  that 
faucet,  but  a  reasonable  amount  for  use  in  a  residence  of 
the  size  and  character  in  question.  This  reasonable  amount 
is,  of  course,  a  very  indefinite  and  unsatisfactory  measure, 
but  such  as  it  is,  it  forms  the  basis  for  the  only  justifica- 
tion of  the  flat  rate  plan.  When  the  use  exceeds  a  reason- 
able one  the  number  and  nature  of  fixtures  are  no  longer 
any  index  of  the  amount  of  water  used,  and  at  that  point 
some  more  definite  and  certain  system  of  measurement 
must  be  introduced.  Where  the  flat  rate  plan  breaks  down, 
therefore,  as  it  does  to  a  greater  or  less  extent  in  the 
majority  of  water  plants,  it  becomes  necessary  to  introduce 
the  meter  system  of  selling  water.  That  the  meter  system 
is  theoretically  correct  hardly  admits  of  argument.  The 
only  cases  in  which  metering  may  not  be  the  proper  method 
of  dealing  with  the  sale  of  water  would  be  cases  in  which 
the  costs  involved  in  connection  with  metering,  the  interest, 
depreciation,  and  taxes  upon  the  meter  and  its  connections, 
the  reading  and  maintenance,  the  office  work  involved  in 
keeping  records  and  the  other  expenses  connected  with  the 


WATER  UTILITIES  215 

use  of  the  meter  system  would  more  than  offset  the  saving 
which  would  be  effected  by  the  decreased  consumption,  or 
rather  by  the  decreased  waste  of  water.  In  cases  where 
the  available  water  supply  is  being  overtaxed  or  where  the 
distribution  system  is  not  properly  designed  to  furnish 
adequate  pressure  at  consumers'  premises  when  the  flat 
rate  system  prevails,  the  use  of  meters  will  often  decrease 
the  waste  of  water  so  much  as  to  make  the  existing  supply 
adequate  and  the  distribution  system  large  enough  to 
furnish  the  necessary  pressure.  As  in  almost  all  of  the 
classes  of  water  service,  the  meter  rates  which  are  now  in 
use  have  not  in  general  been  the  result  of  any  careful 
analysis.  Meter  rates  are  frequently  copied  bodily  from 
those  in  use  in  other  cities.  City  after  city  in  the  state  of 
Wisconsin  can  be  found  with  regressive  schedules  of  meter 
water  rates  which  are  almost  entirely  identical,  with  the 
possible  exception  of  the  exact  number  of  cents  which 
should  be  charged  per  thousand  gallons.  Instances  have 
been  found  in  Wisconsin  where  schedules  were  so  badly 
regressive  that  a  consumer  could  use  two  and  one  half  times 
as  much  water  as  another  used  and  still  pay  the  same 
amount,  and  where  all  intermediate  consumers  paid  less 
than  either  one.1  The  argument  which  has  been  made  in 
favor  of  such  schedules  is  that  they  afford  a  rate  by  which 
very  large  consumers  can  be  taken  on.  This  is  often  very 
true,  but  the  discriminations  are  so  marked  and  so  un- 
justifiable and  all  the  good  results  which  can  be  obtained 
can  be  so  easily  reached  by  other  forms  of  schedules  that 
a  regressive  schedule  can  hardly  be  justified  in  any  case. 
Where  the  regressive  schedule  is  not  in  use  the  most 
general  type  of  meter  rate  provides  for  a  decreasing  charge 
per  unit  as  more  water  is  used,  but  does  not  allow  the  use 
of  a  large  quantity  for  the  same  amount  or  for  less  than 

1  See  Ch.  XX  for  diagram  of  regressive  rates. 


216     RAILROADS  AND  PUBLIC  UTILITIES 

is  charged  for  the  use  of  a  smaller  quantity.  The  principal 
variation  in  the  non-regressive  schedules  arises  from  the 
manner  in  which  the  minimum  charge  is  assessed.  In  some 
cases  there  is  a  minimum  charge  per  quarter  or  per  half 
year  of  the  same  amount  for  each  size  of  meter.  In  some 
cases  the  minimum  charge  for  large  meters  is  greater  because 
the  amount  of  water  which  can  be  used  under  this  minimum 
is  greater  than  in  the  case  of  small  meters.  In  some  cases 
a  service  charge  varying  according  to  the  size  of  the  meter 
is  made  use  of  and  in  still  other  cases  a  varying  minimum 
charge  which  is  greater  for  the  large  sizes  of  meters,  but 
which  permits  the  use  of  the  same  quantity  of  water  for  all 
sizes  of  meters  and  thus  combines  in  effect  the  ordinary 
minimum  bill  and  service  charge,  is  in  use. 

Separate  plants  which  furnish  fire  protection  and  gen- 
eral service  would  differ  in  many  respects.  For  fire  pro- 
tection the  system  must  generally  be  so  designed  that  a 
great  amount  of  water,  under  high  pressure,  can  be  fur- 
nished at  any  point  to  be  protected,  the  amount  of  water 
which  can  be  delivered  in  a  given  time  depending  upon  the 
nature  of  the  risks  in  the  area  affected.  There  must  be 
powerful  pumping  machinery,  a  plentiful  supply  of  water, 
large  mains  capable  of  withstanding  pressure  and  a  suffi- 
cient number  of  hydrants.  If  the  system  were  to  serve 
the  commercial  and  industrial  consumers  only  a  somewhat 
different  set  of  requirements  would  be  found.  The  supply 
of  water  must  be  pure,  it  need  be  delivered  only  under 
moderate  pressure  and  the  distribution  system  need  not 
usually  be  designed  to  furnish  a  large  amount  of  water  at 
any  point  to  which  the  system  extends.  When,  as  is 
usually  the  case,  one  water-supply  system  serves  both  pur- 
poses, the  system  must  be  able  to  meet  the  requirements  of 
both  classes  of  service.  There  are  certain  economies  re- 
sulting from  the  use  of  a  combination  system,  economies 
both  in  construction  and  in  operation.    There  may  be  some 


WATER  UTILITIES  217 

respects,  too,  in  which  the  combined  system  is  more  ex- 
pensive than  separate  systems  would  be.  In  general  the 
combination  has  so  many  advantages  that  separate  systems 
are  seldom  used.  Because  of  the  fact  that  water  plants 
serve  two  widely  different  purposes,  which  makes  the  in- 
vestment somewhat  higher  than  it  would  be  for  either 
service  separately,  it  becomes  necessary  to  apportion  the 
property  so  that  each  branch  can  be  assessed  with  its  fair 
share  of  interest,  profits,  and  depreciation. 

In  an  attempt  to  determine  the  cost  of  each  of  the  two 
classes  of  service,  as  a  basis  for  charges  for  each  class, 
as  well  as  for  individual  consumers  or  classes  of  consumers, 
it  is  important  that  we  have  in  mind  what  the  nature  of 
these  costs  is.  Because  the  two  branches  of  service  are 
supplied  by  the  same  utility  it  follows  that  many  of  the 
expenses  involved  are  joint  expenses.  Water  is  taken  from 
the  same  source  of  supply;  very  often  the  same  boilers 
and  pumps  are  used,  and  delivery  is  effected  through  the 
same  mains.  It  is  impossible  to  actually  keep  the  expenses 
of  the  two  classes  separate.  Some  method  or  methods  of 
apportionment  must  be  resorted  to.  What  these  methods 
should  be  must  depend  largely  upon  the  nature  of  the 
expenses  and  the  elements  which  cause  them  to  be  present. 
The  methods  followed  by  the  Commission  in  making  water 
rates  have  been  explained  rather  fully  in  Chapter  X  so 
that  in  this  chapter  the  discussion  may  be  confined  to  the 
various  types  of  schedules  and  methods  of  charging  which 
have  been  in  use  or  which  are  recommended  by  the  Com- 
mission. 

The  Commission's  method  of  fixing  water  rates  may  be 
objected  to  on  the  ground  that  it  does  not  lead  to  the  full 
realization  of  the  theory  of  demand,  consumer,  and  output 
costs,  on  which  it  is  based.  In  the  sense  that  these  elements 
are  recognized  in  a  well-adjusted  schedule  of  electric  rates, 
it  is  true  that  the  schedule  of  water  rates  is  not  perfect. 


218     RAILROADS  AND  PUBLIC  UTILITIES 

Because  of  the  manifest  impossibility  of  determining  mathe- 
matically correct  ratios  for  the  distribution  of  demand 
expenses  and  because,  in  the  case  of  very  large  users,  the 
business  of  a  water  plant  becomes  subject  to  competition, 
it  is  true  that  the  theory  of  demand  rates  for  general  water 
service  cannot  be  fully  carried  out  in  practice.  All  that 
is  claimed  is  that  such  rates  as  those  outlined  above  con- 
stitute a  step  in  the  right  direction  and  about  as  great  a 
step  as  the  practical  matters  involved  make  possible.  In 
no  other  line  of  public  utility  business  is  the  quality  of 
the  service  furnished  of  as  great  importance  as  in  that  of 
public  water  supply.  Poor  electric  lights  or  low-grade 
gas  are  serious  because  they  affect  the  convenience  of  the 
users  very  materially,  but  the  problem  of  improper  water 
service  is  only  to  a  relatively  small  degree  a  question  of 
convenience.  The  condition  of  public  health  is  so  closely 
related  to  the  purity  and  adequacy  of  the  public  water 
supply  that,  important  as  the  question  of  convenience  may 
be,  it  is  overshadowed  by  the  more  vital  matter  of  the 
public  health. 

There  are  two  requirements  which  the  needs  of  public 
health  put  upon  the  water-supply  systems.  Under  modern 
conditions  of  life  the  sanitary  requirements  of  urban  popu- 
lations require  a  rather  large  quantity  of  water  which  must 
be  available  at  prices  which  will  not  discourage  its  proper 
use.  One  of  the  advantages  claimed  for  a  minimum  bill 
rate  as  distinguished  from  the  service  charge  rate  is  that, 
with  a  minimum  bill,  consumers  are  encouraged  to  use 
water  up  to  the  amount  coming  under  the  minimum,  which 
amount  is  usually  sufficient  for  sanitary  purposes.  "With 
the  service  charge  rate,  there  is  a  charge  for  each  unit  of 
consumption,  which,  it  is  claimed,  discourages  the  use  of 
even  the  minimum  amount  of  water  required  for  proper 
sanitation.  It  is  stated  that  in  Milwaukee,  even  with  a 
uniform  rate  of  only  six  cents  per  thousand  gallons,  with 


WATER  UTILITIES  219 

no  minimum  bill,  the  effect  of  the  rate  is  to  cut  the  con- 
sumption of  large  classes  of  the  population  far  below  the 
sanitary  requirement. 

Investigators  in  Milwaukee  have  stated  that  it  was  not 
unusual  to  find  places  where  toilets  were  flushed  only  once 
a  day.  With  a  rate  of  six  cents  per  thousand  gallons, 
$1.50  per  year  would  provide  an  adequate  supply  of  water 
for  all  ordinary  sanitary  requirements  for  an  average  fam- 
ily. This  shows  the  importance  of  an  understanding  of 
service  conditions  in  connection  with  rate-making. 

Quality  of  water  rather  than  the  extent  of  the  supply 
is  the  other  important  element  in  the  general  service  of 
a  water  utility.  The  necessity  of  pure  water  is  so  well 
understood  that  it  is  surprising  to  find  as  large  a  number 
of  contaminated  supplies  as  still  exist.  Methods  of  purifi- 
cation are  not  well  understood  in  the  smaller  plants,  and 
people  generally  have  not  placed  so  high  a  value  on  the 
public  water  supply  that  they  will  bear  the  frequently 
heavy  cost  of  developing  pure  supplies.  The  case  of  the 
La  Crosse  water  works  is  illustrative.  The  city  of  La 
Crosse  took  its  water  from  the  Mississippi  River,  which  was 
so  badly  contaminated  that  the  water  was  unfit  for  general 
use.  After  considering  all  possible  methods  of  remedying 
the  situation  the  Commission  ordered  the  city  to  abandon 
its  river  supply  and  develop  a  set  of  wells  from  which 
the  supply  should  be  obtained.  This  new  source  of  supply 
is  now  in  use. 

Another  requirement  of  service  is  that  imposed  by  the 
necessity  for  adequate  fire  protection.  In  a  number  of 
cases  the  Commission  has  found  it  necessary  to  order  im- 
provements in  order  to  secure  adequate  fire  protection. 
In  Sheboygan  reenforcement  of  the  distribution  system 
by  the  installation  of  large  auxiliary  mains  leading  directly 
to  the  areas  affected,  was  ordered.  At  Beaver  Dam  the 
problem  was  one  of  station  capacity,  and  new  boilers  and 


220     RAILROADS  AND  PUBLIC  UTILITIES 

pumps  were  required.  General  improvement  of  the  system 
was  ordered  for  Antigo,  in  order  that  fire  protection  would 
be  adequate.  Extensions  of  mains  to  serve  outlying  dis- 
tricts have  been  ordered  in  a  number  of  other  cases,  notably 
in  Madison  and  Beloit. 

Aside  from  the  regulation  of  rates  and  service  the  Com- 
mission has  made  valuations  of  a  considerable  number  of 
water  plants  for  purposes  of  municipal  purchase,  but  these 
are  discussed  at  another  point  in  this  book. 


CHAPTER  XV 

THE  INDETERMINATE  PERMIT   AND   CONVENIENCE  AND 

NECESSITY    LAWS 

To  prevent  unnecessary  duplication  of  public  utility 
properties  in  the  future ;  to  accomplish  a  thorough  regula- 
tion of  existing  plants  by  state  control  of  rates,  service 
and  securities,  and  to  subject  these  utilities  to  municipal 
purchase  at  the  will  of  the  community,  are  results  attained 
through  the  convenience  and  necessity  and  indeterminate 
permit  laws  administered  by  the  Railroad  Commission. 

The  first  of  these  statutes  applies  only  to  proposed  ex- 
tensions or  new  undertakings.  Before  a  railroad  or  utility 
may  enter  a  field,  it  must  secure  the  Railroad  Commis- 
sion's approval — a  provision  designed  to  obviate  unneces- 
sary duplication  of  properties.  The  certificate  issued  by 
the  Commission  is  fundamentally  a  franchise.  It  is  granted 
or  refused  only  after  public  hearing  and  may  be  revoked 
by  the  Commission  for  failure  to  utilize  the  same  within 
one  year  after  date  of  issue.1  The  doctrines  involved  here 
are  an  abandonment  of  the  principle  of  free  competition ; 
a  recognition  by  the  state  that  these  enterprises  are  vir- 
tually monopolies.  Laws  enacted  in  nineteen  different 
states  now  require  the  use  of  certificates  of  convenience  and 
necessity  by  either  railroads,  utilities,  or  both,  for  new 
undertakings.2 

1  Sec.  1797—44-52    (Ch.  454,  Laws  of  1907)   and  Section  1797  m 
=  74  n,  Revised  Statutes  of  1913. 

2  Arizona,  California,  Connecticut,  Idaho,  Illinois,  Indiana,  Kan- 
sas, Maine,  Maryland,  Massachusetts,  Michigan,  Missouri,  New  Hamp- 

221 


222     RAILROADS  AND  PUBLIC  UTILITIES 

All  existing;  franchises  of  utilities  in  "Wisconsin  regard- 
less of  term  limitation  were  revoked  under  a  law  enacted 
in  1911,  and  the  companies  have  been  given  indeterminate 
permits.  This  legislative  enactment  was  preceded  by  a 
law  in  1907  which  gave  the  companies  the  option  of  sur- 
rendering their  franchises  and  receiving  in  lieu  thereof 
indeterminate  permits.  Doubt  as  to  the  legal  right  of 
directors  and  stockholders  to  make  the  surrender  without 
the  consent  of  bondholders,1  the  practical  impossibility  of 
ascertaining  all  bondholders  and  securing  their  consent, 
and  the  ill-conceived  idea  of  the  value  of  their  franchises, 
deterred  a  large  number  of  utilities  from  voluntarily  com- 
ing under  the  law.2 

How  this  much-discussed  optional  statute  operated  is 
indicated  in  a  letter  written  by  Commissioner  Erickson 
under  date  of  December  17,  1913,  to  Professor  G.  A.  Gesell, 
Minneapolis,  Minnesota.  An  extract  from  the  relevant 
portion  of  that  letter  follows : 

I  have  taken  these  figures  for  the  year  1911,  as  that  year 
marked  the  end  of  the  period  in  which  companies  could  volun- 
tarily surrender  their  franchises.  I  find  that  at  that  time  there 
were  140  private  electric  utilities  reporting  to  the  Commission,  of 
whom  53  voluntarily  surrendered  their  franchises.  There  were  40 
private  gas  companies,  of  whom  15  had  surrendered  their  fran- 
chises ;  31  private  water  utilities,  with  19  franchises  surrendered ; 
and  14  heating-  utilities,  with  7  franchises  surrendered. 

The  following  table  shows  the  total  property  and  plant  of 
companies  which  voluntarily  took  the  indeterminate  permit,  and 
the  total  property  and  plant  of  all  private  utilities  reporting  for 

shire,  New  York,  Pennsylvania,  South  Dakota,  Vermont,  West  Vir- 
ginia and  Wisconsin. 

1  Farmers  Loan  and  Trust  Co.  of  New  York,  acting  as  trustees  for 
the  bondholders  of  the  Eacine  Water  Works  Co.,  have  begun  litiga- 
tion in  the  federal  court  for  the  Eastern  District  of  Wisconsin  to 
determine  the  legality  of  this  principle. 

2  John  H.  Eoemer,  ''Certain  Important  Provisions  of  the  Public 
Utility  Law  of  Wisconsin,"  5. 


INDETERMINATE  PERMIT,  CONVENIENCE    223 

the  year;  also  the  total  operating  revenue  of  all  companies  vol- 
untarily taking  the  indeterminate  permit  and  the  total  operating 
revenue  of  all  private  utilities  reporting  for  the  year;  and  also 
the  percentage  relation  existing  between  the  companies  which 
took  the  indeterminate  permit  and  the  total  of  all  companies. 


Property  and 

Total  operat- 

plant of  com- 

Total private 

Per 

ing  revenue 

Total  private 

Per 

Utility 

panies  receiv- 

property 

cent 

of  companies 

operating 

cent 

ing  indetermi- 

and plant 

receiving  in- 

revenues 

nate  permits 

determinate 
permits 

Electricity  . 

$10,S22,21S.61 

$3.8, 166,778 .44 

28.4 

$2,027,263  .65 

$5,238,614.41 

38.7 

Gas 

5,497,247  .22 

25,063,185.93 

21.9 

860,375  .50 

4,159,159.64 

20.7 

Water 

9,652,200 .59 

10,361,337.47 

93.2 

[907,006.37 

982,392  .63 

92.3 

Heat 

921,550.26 

1,278,419.71 

17.2 

150,542  .48 

231,944.56 

64.9 

You  will  note  that  telephone  companies  are  not  included  be- 
cause the  indeterminate  permit  feature  did  not  apply.  Telephone 
companies  in  this  state  never  had  municipal  franchises.  Their 
franchises  were  granted  directly  by  the  state  and  consequently 
there  was  no  municipal  franchise  to  surrender. 


It  soon  became  evident  that  it  would  require  many  years 
to  accomplish  the  purpose,  so  the  legislature  of  1911,  acting 
under  the  reserve  power  of  the  constitution  to  alter  or 
repeal  corporation  franchises,  amended  every  utility  fran- 
chise in  the  state,  making  it  an  indeterminate  permit.  This 
law  gives  a  uniformity  to  franchise  permits  and  subjects 
all  utilities  to  the  terms  of  the  Public  Utility  Law.  The 
validity  of  this  legislation  has  been  sustained  by  the  su- 
preme court  of  the  state. 

The  legal  right  to  grant  a  franchise  is  based  on  the 
principle  that  it  will  minister  in  some  capacity  to  public 
welfare.  Before  the  enactment  of  the  Public  Utility  Law, 
franchises  were  granted  to  public  utility  companies  by 
cities  acting  as  the  agents  for  the  state.  Sometimes  these 
permits  were  for  a  limited  period  of  years  and  at  other 
times  perpetual.     Often  they  were  exclusive  as  to  all  pos- 


224     RAILROADS  AND  PUBLIC  UTILITIES 

sible  competitors.  Because  of  changing  and  unforeseen 
conditions,  such  as  improvements  in  the  utility  business  and 
the  rapid  increase  of  population,  it  was  practically  im- 
possible to  frame  a  franchise  that  would  cover  the  require- 
ments arising  through  a  term  of  years.  Several  of  the  fac- 
tors that  prompted  the  legislature  in  abrogating  all  fran- 
chises were  their  incongruous  provisions,  their  inconsisten- 
cies and  their  utter  failure  to  secure  proper  regulation  by 
this  system. 

To  clearly  distinguish  public  advantages  under  the  in- 
determinate permit  law,  a  review  of  regulation  through 
franchise  provisions  will  be  necessary.  The  franchise  for- 
merly held  by  "Wisconsin  utilities  has  been  defined  as  "a 
grant  by  the  state  of  special  privileges  and  immunities  and 
with  corresponding  obligations  and  1  responsibilities  on  the 
part  of  the  grantee,  that  it  is  always  the  creature  of  the 
state  and  in  Wisconsin  is  subject  under  constitutional 
reservation  to  revocation  or  amendment ;  that  the  accept- 
ance of  the  grant  implies  an  assumption  to  furnish  reason- 
able service  to  the  public  at  a  reasonable  charge  and  that 
though  under  the  conditions  existing  prior  to  direct  state 
regulation  by  a  Commission,  there  was  virtually  no  exer- 
cise of  the  regulatory  powers  which  were  in  the  legislature, 
yet  these  powers  existed  and  every  franchise  was  subject 
to  them." 

Many  of  the  perpetual  franchises  were  so  devoid  of 
limitations  that  more  power  was  imposed  in  the  utilities 
than  should  be  exercised  by  a  private  corporation  serving 
a  public  need.  Their  terms  operated  as  a  barrier  to  secure 
the  readjustments  of  differences  that  develop  from  time  to 
time  in  a  growing  community.  The  very  perpetuity  of 
the  provisions  was  viewed  as  a  valuable  right  that  led  to 
overcapitalization   and    made    the   managements   arrogant 


Halford  Eriekson,  Unpublished  article  on  Indeterminate  Permits. 


INDETERMINATE  PERMIT,  CONVENIENCE    225 

and  unwilling  to  make  the  improvements  and  rearrange- 
ments of  service  deemed  necessary  under  public  regulation 
in  the  interests  of  the  general  welfare. 

Equally  serious  were  the  objections  against  the  short- 
term  franchise.  The  limitation  of  term  made  rates  un- 
necessarily high  in  order  to  secure  a  return  of  the  capital 
invested  before  the  period  of  operation  expired.  Where 
the  right  to  operate  is  indeterminate  no  allowance  other 
than  depreciation  is  required  for  the  restoration  of  original 
capital  invested.  Rates  to  consumers  can  be  reduced  corre- 
spondingly. But  the  uncertainty  of  securing  a  renewal  of 
a  limited  franchise  grant  tended  to  restrain  the  entrance 
of  capital  into  enterprises;  limited  the  extensions  of 
new  service  lines  and  community  development  and  en- 
couraged the  management  to  allow  its  plant  and  service  to 
deteriorate  that  its  loss  might  not  be  so  great  at  the  day 
of  franchise  expiration.  Such  conditions  frequently  com- 
pelled the  company  to  enter  into  politics,  which  led  to  all 
sorts  of  dickering  with  councils,  to  obtain  a  renewal.  The 
shirking  of  many  of  the  responsibilities  that  have  later 
been  imposed  under  the  indeterminate  permit  were  not  only 
tolerated  but  complacently  borne  by  the  public  under  a 
system  of  franchise  control. 

Again,  under  franchise  regulation,  some  cities  pro- 
ceeded on  the  policy  that  low  rates  and  good  service  could 
be  secured  only  through  competition.  Several  plants  were 
awarded  franchises  to  render  service  in  one  locality.  Time 
and  experience  have  demonstrated  this  to  be  a  mistaken 
economic  theory.  Two  utilities  covering  the  same  terri- 
tory double  the  investments — buildings,  equipment  and 
distribution  systems — and  each  must  maintain  separate 
business  organizations.  Under  this  method  two  plants  are 
required  to  do  what  one  plant  could  as  well  accomplish  at 
less  expense.  Economic  waste  is  the  result.  Competition 
thus  secured  is  usually  of  short  duration.     It  confines  it- 


226     RAILROADS  AND  PUBLIC  UTILITIES 

self  largely  to  first  choice  customers.  Once  a  consumer  is 
connected  to  one  system  he  finds  it  impossible  to  change 
to  another  plant  without  a  greater  expense  than  any  pos- 
sible saving  in  rates.  This  contest  for  new  customers 
often  results  in  rate  wars  that  inevitably  culminate  in  one 
or  both  companies  going  bankrupt;  the  service  to  the  pub- 
lic is  seriously  crippled  and  in  the  end  one  plant  buys  the 
other's  property.  The  enterprise  is  then  made  the  object 
of  new  stock  issues  often  in  excess  of  the  combined  valua- 
tions, thereby  saddling  the  public  with  additional  burdens. 
Or  perhaps  a  compromise  between  the  utilities  may  be  ef- 
fected. The  companies  either  divide  territory  or  agree  on 
rates.     Competition  as  a  regulator  is  then  dead. 

Reason  for  the  failure  of  regulation  through  competi- 
tion is  to  be  found  in  the  fact  that  these  utilities  are  es- 
sentially monopolistic.  There  may  be  competition  between 
merchants ;  there  cannot  be  continuous  competition  in  util- 
ity properties.  This  is  because  of  the  character  of  the 
utility  business.  The  cost  of  production  of  a  merchant's 
goods  is  not  increased  by  the  number  of  stores  in  a  city. 
In  the  gas  industry  which  uses  the  public  streets,  duplicate 
investments  are  necessary  in  order  that  two  companies  may 
serve  consumers  on  one  street.  An  increase  in  investment 
means  an  increase  in  cost  of  production  and  high  rates 
for  service.  If  gas  could  be  bought  in  a  pail  at  a  store 
and  carried  home  the  situation  would  be  analogous  with 
that  of  the  storekeeper. 

To  eliminate  the  evils  under  franchise  regulation  the 
legislature  adopted  the  indeterminate  permit  law. 

Like  the  franchise,  the  indeterminate  permit  gives  the 
utility  the  right  to  occupy  streets  for  the  purpose  of  de- 
livering a  needed  service  to  the  public,  subject,  however,  to 
all  the  terms  and  requirements  of  the  Public  Utility  Law. 
Another  reason  why  competition  should  be  restricted  is 
that  duplicate  equipment  crowds  the  streets  and  highways 


INDETERMINATE  TERMIT,  CONVENIENCE    227 

with  unsightly  obstructions.  Moreover,  under  conditions 
of  strict  control  the  existing  utility  is  subjected  to  far- 
reaching  regulation.  It  must  maintain  good  service ;  pro- 
vide capital  for  the  needed  extensions,  and  keep  its  plant  in 
operation,  even  at  a  financial  loss.  Under  such  circum- 
stances the  legislature  in  enacting  the  indeterminate  permit 
law  believed  that  reasonable  protection  from  competition 
within  its  field  was  but  just. 

Speaking  of  the  effect  of  duplication  both  upon  the 
rates  and  the  cost  of  the  service,  Commissioner  Erickson 
has  said: 

In  connection  with  the  application  for  certificates  of  conven- 
ience 1  and  necessity  that  have  come  before  the  Wisconsin  Com- 
mission, I  have  often  had  occasion  to  investigate  the  effect  upon 
the  existing  utility  and  customers  as  well  as  upon  the  munici- 
pality of  dividing  up  its  business  with  an  additional  plant.  In 
these  investigations  I  have  almost  invariably  found  that  such  a 
division  of  the  business  would  have  greatly  reduced  the  net 
earnings  of  the  existing  plant,  while  at  the  same  time  it  would 
have  seriously  increased  the  cost  per  unit  of  service  to  the  public. 
Time  will  not  permit  me  to  go  into  details.  But  in  one  case  where 
the  city  officials  desired  to  erect  a  municipal  plant  for  the  pur- 
pose of  lighting  its  streets  and  public  buildings,  it  was  found 
that  the  granting  of  this  application  would  have  decreased  the 
revenues  of  the  existing  company  by  considerably  more  than  twice 
as  much  as  it  would  have  decreased  its  expenses;  that  it  would 
have  caused  an  increase  of  about  15  per  cent  in  the  cost  to  the 
city  of  the  street  and  other  public  lighting;  that  it  would  have 
increased  the  cost  per  kilowatt  hour  to  private  lighting  and 
power  users  of  the  city  by  nearly  20  per  cent;  and  that  these  in- 
creases in  the  costs  were  far-reaching  enough  so  that  under  rates 
that  were  high  enough  to  cover  them  it  would  have  been  impos- 
sible to  expand  the  electrical  business  or  even  to  retain  all  of 
the  business  the  existing  plant  then  had.  To  have  granted  the 
certificate  under  such  conditions  could  hardly  have  been  in  line 

1  Commissioner  Erickson,  Address  at  Cedar  Point,  Ohio,  July  23, 
1914. 


228     RAILROADS  AND  PUBLIC  UTILITIES 

with  public  policy.  And  yet  because  the  certificate  was  not 
granted,  tbe  Commission  has  been  bitterly  criticized,  not  only  by 
local  interests  but  by  persons  outside  of  tbe  state. 

The  essential  differences  between  the  franchise  and  the 
indeterminate  permit  are  to  be  found  in  the  fact  that: 

First — The  indeterminate  permits  recognize  the  mo- 
nopolistic character  of  these  utilities  and  prohibit  new 
competition  until  public  convenience  and  necessity,  as  de- 
termined by  the  Railroad  Commission,  require  the  opera- 
tion of  a  second  utility. 

Second — The  right  to  operate  is  indeterminate,  subject 
to  the  consent  of  the  city  to  purchase  the  property  at  any 
time  at  a  price  to  be  fixed  by  the  Railroad  Commission. 

The  principle  embodied  in  the  indeterminate  permit 
was  early  recognized  in  Massachusetts  in  granting  fran- 
chises to  street  railway  companies.1  Wisconsin,  however, 
was  the  first  state  to  substitute  it  for  the  special  franchise 
and  give  the  law  a  general  application.  If  commission 
regulation  were  to  enforce  proper  service  and  reasonable 
charges  based  upon  cost  of  operation,  corporations,  oper- 
ating under  special  term  franchises  which  had  not  main- 
tained amortization  funds  to  mature  at  the  expiration  of 
the  terms,  could  give  assurance  neither  to  capital  nor  to 
the  public  being  served  of  a  maintenance  of  satisfactory 
conditions.  The  indeterminate  permit  offers  a  remedy. 
It  aids  in  carrying  out  the  chief  purpose  of  regulation 
which  has  been  succinctly  summarized  by  the  supreme 
court  thus:  "Service  as  efficient,  as  practicable,  at  as  low 
rates,  as  just 2  and  practicable,  under  the  circumstances  of 
each  particular  situation." 

1  Charles  Francis  Adams,  Secretary  Massachusetts  Special  Com- 
mittee (189S),  "Relations  Between  Cities  and  Towns  and  Street  Rail- 
ways," 17.  TJie  Annals  of  the  American  Academy  of  Political  and 
Social  Science,  May,   1914,  LTTT,   136. 

2  Calumet  Service  Co.  v.  Chilton,  14S  Wisconsin  Reports,  334-364. 


INDETERMINATE  PERMIT,  CONVENIENCE    229 

No  better  explanation  of  the  purpose  and  scope  of  the 
law  can  be  found  than  that  contained  in  one  of  the  Com- 
mission's early  decisions,  which  said: 

By  making  a  surrender  of  its  franchise  and  accepting  in  lieu 
thereof1  an  indeterminate  permit,  a  public  utility  acquires,  in 
effect,  a  legally  protected  monopoly  and  the  right  to  continue  its 
public  service  indefinitely.  Such  monopoly  cannot  be  destroyed 
except  it  be  established  that  public  convenience  and  necessity  re- 
quire a  second  public  utility  to  engage  in  the  same  business  in 
the  municipality.  By  extending  its  plant  to  meet  the  public 
exigencies  as  they  arise,  and  by  discharging  its  public  functions 
properly,  a  public  service  corporation  may  maintain  its  monopoly 
of  the  business  as  long  as  it  continues  operation.  Neither  can 
its  enjoyment  of  such  monopoly  nor  its  right  to  remain  in  the 
public  service  be  terminated  by  the  municipality,  except  upon 
payment  to  it  of  "just  compensation"  for  all  its  "property  ac- 
tually used  and  useful  for  the  convenience  of  the  public."  As  a 
consideration  for  the  valuable  privileges  thus  guaranteed,  the 
law  provides  that  the  term  of  the  license  or  franchise  authorizing 
the  maintenance  and  operation  of  the  plant  be  determinable  at 
the  will  of  the  municipality. 

In  the  same  litigation  the  Commission  previously  held 
that  the  indeterminate  permit  is 

more  valuable  than  the  ordinary  special  franchises,  because  the 
company  2  now  has  a  legally  protected  monopoly  and  is  subject 
to  no  different  supervision  and  regulation  than  it  would  have 
been  had  it  continued  to  operate  under  its  original  grant.  Fur- 
thermore, its  investment  is  now  protected  not  only  against  the 
consequences  of  competition,  but  also  against  the  possibility  of 
total  loss  on  the  expiration  of  the  original  grant.  It  can  never 
be  deprived  of  its  property  except  on  the  payment  of  the  fair 
value  thereof  by  the  municipality. 


1In  re  Appleton  Water  Works  Co.,  1910,  6  W.  E.  C.  K.,  119. 
2  City  of  Appleton  v.  Appleton  Water  Works  Co.,  1910,  5  W.  E. 
C.  E.,  284-285. 


230     RAILROADS  AND  PUBLIC  UTILITIES 

Moreover,  the  courts  have  held  that  the  scope  of  privi- 
lege acquired  by  surrendering  a  franchise  and  taking  out 
an  indeterminate  permit  under  the  Public  Utility  Law  is 
the  same  as  under  the  old  franchise ;  that  the  multiplicity 
of  differences  existing  in  franchises  are  brought  under 
one  system  and  subject  to  a  single  standard — the  require- 
ments of  the  Public  Utility  Law— and  that  the  provisions 
of  the  Public  Utility  Law,  ''providing  methods  by  which 
a  municipality  may  become  the  owner  of  a  public  utility 
business,  by  implication  prohibit  the  municipality  from 
becoming  the  owner  of  the  plant  in  any  other  way." 

Opposition  to  the  indeterminate  permit  is  based  on  the 
fact  that  it  changes  all  term  franchises  into  what  are  vir- 
tually perpetual  franchises,  and  that  it  prevents  competi- 
tion by  fostering  monopoly. 

The  first  distinction  is  not  entirely  correct.  Justice 
Timlin  pointed  out  in  his  opinion  in  the  Calumet  Service 
case,  that 

the  indeterminate  permit  obtained  upon  surrender  of  the  preexist- 
ing x  franchise  is  not  necessarily  a  perpetual  permit  subject  only 
to  the  conditions  presently  prescribed  in  the  Public  Utility  Law. 
That  law  is  subject  to  repeal  or  amendment  by  other  statutes. 

Likewise,  the  supreme  court  has  had  occasion  to  point 
out  that  such  utilities  have  not  all  the  characteristics  of 
a  monopoly.     In  the  same  case  the  court  said: 

So  while,  in  common  parlance,  it  is  proper  to  characterize 
the  exclusive  privilege  in  question,  a  monopoly,  it  is  one  pur- 
chased by  giving  an  equivalent  to  the  public,  as  in  case  of  a  pat- 
ent allowed  by  the  federal  government.  It  is  a  grant  for  a  pub- 
lic, not  for  a  private  purpose,  and  not  a  grant  of  that  which, 
without  it,  would  be  of  common  right,     It  has  none  of  the  essen- 


148  Wisconsin  Reports,  334. 


INDETERMINATE  PERMIT,  CONVENIENCE    231 

tials  of  the  monopoly  as  offensive,  anciently,  in  the  eye  of  the 
law.1 

While  the  indeterminate  permit  is  often  referred  to  as 
an  exclusive  privilege,  an  examination  of  the  law  shows 
this  is  not  an  exact  fact.  The  statute  empowers  the  Rail- 
road Commission  at  any  time  to  admit  a  competing  utility 
if  after  a  public  hearing  it  appears  that  public  conven- 
ience and  necessity  require  such  competition.  The  exist- 
ence of  this  provision  enforces  good  behavior.  In  no  in- 
stance has  it  been  necessary  for  the  Commission  to  grant 
a  permit  to  another  utility  to  compete.  The  law  robs  the 
monopoly  of  the  power  to  charge  other  than  just  rates. 
Thus  after  quoting  the  provisions  of  the  indeterminate  per- 
mit law,  the  supreme  court  has  said : 

The  purpose  of  it  (indeterminate  permit  law)  is  obvious.  The 
intent  was  to  give  the  holder  of  an  indeterminate  permit  within 
the  scope  thereof,  a  monopoly,  so  long  as  the  convenience  and 
necessity  of  the  public  should  be  reasonably  satisfied,  yet  to  se- 
cure to  the  public  the  benefit  of  the  monopoly  in  excess  of  a  fair 
return  upon  the  investment,  under  proper  administration,  by  in- 
suring to  the  consumer  the  best  practical  service  at  the  lowest 
practical  cost.2 

The  method  of  obtaining  a  permit  under  the  law  is 
simple.  Where  no  utilities  are  in  existence  within  a  muni- 
cipality, application  is  made  by  the  promoters  of  the  enter- 
prise direct  to  the  municipality,  in  which  the  larger  portion 
of  the  utility  will  operate,  for  the  privilege  of  using  its 
streets.  When  this  application  is  granted  it  is  recognized  in 
law  as  an  indeterminate  permit  subject  to  all  of  the  provi- 
sions of  the  Public  Utility  Act.  If  a  utility,  however,  is  al- 
ready in  existence  in  the  municipality,  application  is  made 
direct  to  the  Railroad  Commission  for  a  certificate  of  public 

1  Calumet  Service  Co.  v.  Chilton,  148  Wisconsin  Reports,  334,  359. 
2 145  Wisconsin  Reports,  337,  346. 


232     RAILROADS  AND  PUBLIC  UTILITIES 

convenience  and  necessity.  Even  if  the  Railroad  Commission 
grants  the  certificate  the  applicants  must  still  obtain  a  per- 
mit of  the  municipality  to  use  the  public  streets.  These 
grants  are  surrounded  with  all  of  the  safeguards  neces- 
sary to  preserve  the  paramount  purposes  of  the  Public 
Utility  Law. 

The  recognized  principle  back  of  the  law  is  that  regu- 
lated monopoly  is  better  than  unregulated  competition.  The 
statute  operates  to  reduce  unreasonable  earnings  of  a 
public  utility  company,  and  hence,  forces  the  rates  to 
consumers  below  those  which  would  be  inevitable  under  a 
limited  franchise.  By  preventing  unnecessary  competi- 
tion investments  are  given  greater  stability. 

Under  the  indeterminate  permit  law  no  device  for  profit 
sharing  or  profit  distribution  shall  be  lawful  between  a 
utility  and  its  customers  until  the  Commission  shall  find 
it  to  be  reasonable  and  just.  Advocates  of  home  rule  and 
the  opponents  of  the  indeterminate  franchise  argue  that 
regulation  can  be  secured  under  a  profit-sharing  scheme  or 
by  a  system  of  amortization.  A  close  analysis  of  the  facts 
from  an  economic  and  social  point  of  view  indicates  quite 
clearly  that  this  toll  or  tax  is  not  based  on  sound  economic 
principles.1  Commissioner  Erickson  found  that  "for  five 
typical  lighting  plants  serving  cities  in  which  the  popula- 
tion ranged  from  about  1,000  to  about  350,000  inhabitants 
the  annual  charges  necessary  for  amortizing  cost  of  the 
plants  in  twenty  years  on  a  4-per-cent  sinking  fund  ba- 
sis amounted  to  from  1.33  cents  to  about  2.00  cents  per 
kilowatt  hour  for  the  ordinary  short-hour  lighting  user 
and  from  about  .5  to  nearly  1  per  cent  per  kilowatt  hour 
for  the  average  eight-hour-a-day  power  user.  It  is  hardly 
necessary  to  say  that  these  excesses  in  the  rates  because 
of  the  amortization  charges  are  great  enough  to  be  bur- 

1  Halford    Erickson,   Begulation   versus   Profit   Sharing,   in   Aera, 
Mar.,  1914,  7. 


INDETERMINATE  PERMIT,  CONVENIENCE    233 

densome  to  the  ordinary  user,  and  to  prevent  the  proper 
development  of  the  service,  or  saturation  of  the  terri- 
tory." 

A  4-per-cent  tax  on  the  gross  earnings  of  the  Mil- 
waukee Street  Railway  system  would  amount  "to  11  per 
cent  of  the  net  earnings  for  its  city  service,  to  about  103 
per  cent  of  the  net  earnings  for  its  suburban  service,  and 
to  about  17  per  cent  of  the  net  earnings  for  its  interur- 
ban  service.  Again,  such  a  toll  would  increase  the  cost 
per  city  passenger  about  1/5  cent  and  the  cost  per  city 
car  mile  by  more  than  1.1  cents.  Further,  it  reduces  the 
paying  car  and  passenger  haul  by  0.53  mile.  In  this  case, 
a  toll  of  this  kind  would  thus  absorb  3  per  cent  more  than 
the  entire  net  earnings  of  the  suburban  traffic,  while  on 
the  rest  of  the  line  it  is  enough  of  a  burden  to  be  a  material 
drawback  in  the  proper  development  of  the  service." 

Similarly,  a  4-per-cent  tax  on  the  earnings  of  the 
Mosinee  Electric  Company  would  increase  the  rate  to  con- 
sumers two  cents  per  kilowatt  hour.  The  public  desires 
reasonable  rates  and  good  service.  A  franchise  burdened 
with  tolls  or  extra  charges  shifts  undue  burdens  on  the  con- 
suming public  and  deprives  the  customer  of  the  lowest 
rates  consistent  with  the  service  furnished. 

By  providing  that  a  city  may  purchase  a  plant  at  any 
time  at  a  fair  valuation,  amortization  or  the  writing-off 
of  the  cost  of  the  plant  is  unnecessary.  By  requiring  just 
rates  and  service  through  regulation  it  would  seem  unfair 
to  compel  the  customers  to  pay  an  additional  amount  either 
in  the  form  of  a  tax  or  for  amortization.  The  lower  the 
rates  the  more  the  service  is  utilized.1  Special  taxes  may 
make  rates  so  burdensome  as  to  check  the  use  and  devel- 
opment of  the  business.  "Among  the  most  striking  exam- 
ples of  the  effect  of  reduced  fares  is  the  increased  density 

1  See  Ch.   XXI   for   table   showing  rapid   development   of   service 
under  a  reduction  of  rates. 


234     RAILROADS  AND  PUBLIC  UTILITIES 

of  traffic  which  followed  the  passage  of  the  two-cent  fare 
law  in  Wisconsin.1 

The  charge  is  commonly  made  that  public  utility  regu- 
lation and  the  indeterminate  permit  law  operate  to  ham- 
per municipal  operation.  That  this  is  not  a  fact  is  indi- 
cated by  the  records  of  the  Wisconsin  Commission.  Since 
1907  thirteen  public  utility  plants  have  been  purchased 
under  this  law,  as  follows : 

Cashton  (Electric) $  31,000 

Appleton  (Water  Works) 255,000 

Lake  Geneva  (Water  Works) 80,500 

Manitowoc  (Water  Works) 236,000 

Brodhead  (Electric) 40,000 

Manitowoc  (Electric) 137,500 

Antigo  (Water  Works) 128,800 

Fond  du  Lac  (Water  Works) 320,000 

Sheboygan  (Water  Works) 415,000 

Kaukauna  (Electric) : 50,000 

Whitewater  (Water  Works) 75,000 

Oshkosh  (Water  Works) 525,000 

Beaver  Dam  (Water  Works) 133,000 

At  the  present  time  the  Commission  is  valuing  the 
million-dollar  plant  of  the  Racine  Water  Works  Com- 
pany, a  $75,000  electric  plant  at  Grand  Rapids  and 
a  plant  of  about  $250,000  value  of  the  Janesville  Wa- 
ter AVorks  Company,  all  three  of  which  are  being  sub- 
jected to  municipal  purchase.  The  method  by  which 
a  city  obtains  control  of  a  private  plant  is  simple. 
If  a  vote  of  the  people  determines  that  it  favors  the  pur- 
chase of  a  local  utility,  the  Commission  under  the  law 
must  make  a  valuation  of  the  plant  and  arrange  for  the 
turning-over  of  the  plant  at  a  just  compensation  to  the 
municipality.  While  the  indeterminate  permit  law  is 
by  far  the  most  thoroughgoing  of  any  piece  of  legislation 
of  this  character  enacted  in  the  United  States,  it  would 

1  Judge  E.  Kay  Stevens,  decision  in  Dulutli  Street  Eailway  case, 
Circuit  Court,  Dane  County,  July  28,  1914. 


INDETERMINATE  PERMIT,  CONVENIENCE    235 

seem  that  there  is  one  phase  of  legislation  along  this  line 
that  has  not  yet  been  developed.  The  right  of  a  city  to 
purchase  an  existing  property  should  be  extended  to  pri- 
vate concerns  so  that,  in  case  the  public  desires,  a  private 
company  rendering  inadequate  service  may  have  its  proper- 
ties purchased  by  another  private  company  at  a  fair  com- 
pensation to  be  fixed  by  the  Commission.  That  this  would 
give  a  further  safeguard  as  a  service  developer  cannot  be 
gainsaid.  Such  legislation  has  the  approval  of  Commis- 
sioner Erickson  of  Wisconsin  and  of  Commissioner  Milo 
R.  Maltbie  of  the  first  district  New  York  Public  Service 
Commission.1 

The  public  advantages  under  the  indeterminate  permit 
over  the  term  franchise  were  well  summarized  by  William 
J.  Norton,  when  he  said : 

Under  stale  regulation,  which  assures  the  public  adequate  ser- 
vice at  reasonable  rates,2  a  protection  of  the  monopoly  from  com- 
petition and  the  elimination  of  all  possible  risks  to  capital  in- 
vested result  in  benefits  to  all  parties  concerned.  "Without  pro- 
tection of  such  monopolies  only  a  limited  supervision  of  their  af- 
fairs by  public  authorities  can  be  morally  justified.  This  is  al- 
most axiomatic." 

Those  advocates  of  the  short-term  restrictive  franchise  will 
discover  sooner  or  later  that  burdens  imposed  upon  public  service 
companies  rest  heaviest  upon  the  public  served  and  that  in  order 
to  secure  the  best  service  at  the  lowest  rate  the  company  must  be 
given  every  advantage  to  develop  and  prosper.  The  Massachu- 
setts committee  sums  up  the  situation  in  Great  Britain  as  follows : 

"The  term  franchise  has  there  been  universal  since  1870 
and  the  rights  of  the  municipalities  are  so  very  carefully  pro- 
tected that  their  best  interests  have  been  systematically  sac- 


1  Milo  E.  Maltbie,  The  Indeterminate  Franchise  for  Public  Utili- 
ties, 4. 

2  The  Annals  of  the  American  Academy  of  Political  and  Social 
Science,  May,  1914,  145. 


236     RAILROADS  AND  PUBLIC  UTILITIES 

rificed.  The  municipalities  have,  in  fact,  been  so  afraid  they 
would  be  outbargained  that  they  have  as  a  rule  fairly  over- 
reached themselves;  and  now,  after  a  lapse  of  twenty  years, 
they  are  naturally  served  by  undeveloped  lines,  with  anti- 
quated appliances,  simply  because  they  made  it  the  distinct 
interest  of  the  companies  operating  those  lines  to  provide 
nothing  better." 

They  conclude  that  the  indeterminate  permit,  even  without  the 
provision  for  the  payment  of  a  just  compensation  upon  revoca- 
tion of  the  grant  by  the  municipality,  has  given  a  greater  security 
to  capital  and  induced  markedly  better  service  conditions. 


CHAPTER    XVI 

EEGULATION    OF    STOCKS    AND    BONDS 

Before  railroads  and  public  utilities  can  issue  securities 
in  Wisconsin  they  must  first  obtain  the  approval  of  the 
Railroad  Commission.  The  original  Wisconsin  stock  and 
bond  act  was  enacted  in  1907,  the  provisions  of  the  Texas, 
the  Massachusetts  and  the  Minnesota  laws  being  used  as 
a  basis.1  Investigations  indicate  that  Texas  was  the  first 
state  to  enact  a  statute  of  this  character,  but  it  was  appli- 
cable to  railroads  only.  Under  it  the  Railroad  Commis- 
sion was  given  power  to  approve  bonds  that  did  not  ex- 
ceed the  value  of  the  property  as  fixed  by  the  Commis- 
sion. The  Massachusetts  law  applied  to  the  issues  of  stocks 
and  bonds  of  railways  and  street  railways  and  the  Minne- 
sota statute  to  the  stock  issues  of  railway  corporations. 
Just  before  the  Wisconsin  law  was  finally  enacted  the  Min- 
nesota law  was  declared  unconstitutional  as  an  unlawful 
delegation  of  legislative  powers.  This  necessitated  a  com- 
plete change  of  the  provisions  of  the  pending  legislation 
and  the  enactment  of  a  much  weaker  statute  than  was  orig- 
inally intended.  The  present  law,  enacted  in  1911  and 
amended  in  1913,  preserves  many  of  the  basic  administra- 
tive features  of  the  1907  act.  It  is  more  comprehensive, 
however,  in  correcting  the  evils  it  was  intended  to  remedy. 

1  In  re  Southern  Wisconsin  Railway  Co.,  1907,  2  W.  E.  C.  R.,  55. 
The  Texas  law  became  effective  April  8,  1893.  For  a  resume  of 
accomplishments  under  the  Texas  law,  see  Charles  S.  Potts,  Article 
in  The  Annals  of  the  American  Academy  of  Political  and  Social  Sci- 
ence, May,  1914,  LIII,  162. 

237 


238     RAILROADS  AND  PUBLIC  UTILITIES 

Necessity  for  this  legislation,  reflected  in  the  passage 
of  laws  of  varying  scope  in  twenty-one  different  states,1 
is  found  in  the  evils  of  overcapitalization.  Watering  of 
securities  makes  them  speculative  instead  of  stable,  keeping 
bona  fide  investors  out  of  an  otherwise  attractive  field. 
The  small  investor,  who  otherwise  might  place  his  money 
in  local  public  utility  securities,  aiding  thereby  to  estab- 
lish more  amicable  relations  between  the  public  and  the 
utility,  turns  aside  to  make  his  investments  in  more  certain 
fields.  This  is  because  excessive  capitalization  weakens 
the  assets  and  diminishes  or  makes  doubtful  the  expected 
profits.  Moreover,  to  keep  up  interest  and  profits  on  fic- 
titious issues  leads  to  demands  for  rates  that  are  excessive. 
Overcapitalization  increases  the  financial  risk  and  makes 
it  more  difficult  to  obtain  money  for  new  additions  and  ex- 
tensions; it  often  diverts  money  that  should  go  to  upkeep 
and  renewals  to  pay  dividends  on  this  fictitious  stock,  thus 
in  time  deteriorating  the  quality  of  service ;  it  is  used  as  a 
''blind"  to  show  an  apparently  low  rate  of  return.  If  a 
plant  were  earning  a  profit  of  14  per  cent  on  a  true  cap- 
italization of  $100,000,  public  opinion  would  revolt  and 
demand  a  lowering  of  rates,  but  if  the  same  plant  shows 
only  a  7  per  cent  return  on  an  apparent  capitalization  of 
$200,000  there  will  be  fewer  protests,  and  criticism  of  the 
rate  of  return  may  seem  to  be  without  foundation. 

Many  of  the  railroads  and  public  utility  corporations 
have  been  grossly  overcapitalized  in  the  past.  Shortly 
after  the  1907  stock  and  bond  law  was  passed  the  Southern 
Wisconsin  Railway  company,  which  operates  the  local 
street-car  system  in  the  city  of  Madison,  applied  for  per- 

1  An  examination  of  all  state  laws  enacted  up  to  Oct.  1,  1913, 
showed  the  following  states  had  laws  regulating  security  issues 
through  a  state  agency:  Arizona,  California,  Colorado,  Georgia,  Illi- 
nois, Indiana,  Kansas,  Maine,  Maryland,  Massachusetts,  Michigan, 
Missouri,  Nebraska,  New  Hampshire,  New  Jersey,  New  York,  Ohio, 
Pennsylvania,  Texas,  Vermont  and  Wisconsin. 


REGULATION  OF  STOCKS  AND  BONDS     239 

mission  to  issue  $300,000  of  par  value  serial  bonds.  Inves- 
tigation of  this  company  disclosed  an  example  of  the  sys- 
tem of  overcapitalization  that  existed  before  regulation. 
The  Commission  said  in  its  decision : 

On  the  basis  of  data  in  possession  of  the  Railroad  Commis- 
sion,1 it  may  be  stated  that  the  $685,000  par  value  of  bonds  held 
in  trust  by  the  Citizens'  Saving  and  Trust  company  of  Cleveland, 
Ohio,  more  than  represents  the  full  value  of  the  Madison  street  rail- 
way property;  and  that  neither  the  $450,000  par  value  of  bonds 
held  by  the  Madison  &  Interurban  Traction  company,  nor  the  $50,- 
000  par  value  of  bonds  held  by  the  Southern  Wisconsin  Traction 
and  Light  company,  represent  any  actual  and  necessary  investment 
in  the  present  Madison  street  railway  system,  not  to  speak  of  the 
$815,000  of  bonds,  par  value,  authorized  to  be  issued,  but  not  yet 
issued  by  the  Southern  Wisconsin  Railway  company.  In  other 
words,  the  authorized  bond  issue  of  the  Southern  Wisconsin  Rail- 
way company  equals,  approximately,  five  times  the  cost  of  re- 
production new  of  the  property  upon  which  the  bonds  rest,  while 
the  outstanding  stock  may  be  regarded  as  a  super-bonus  for  a 
promoter.  In  round  numbers  the  bonded  indebtedness  at  pres- 
ent outstanding  amounts  to  $96,000  per  mile;  total  bonds  out- 
standing and  authorized  $160,000  per  mile;  while  the  cost  of  re- 
production new  today  is  less  than  $31,000  per  mile.  .  .  .  The 
capital  issues  of  the  Southern  Wisconsin  Railway  company  have 
been  shamefully  inflated  in  the  past. 

Because  of  these  large  outstanding  issues  some  compa- 
nies have  naturally  experienced  difficulties  in  obtaining 
sufficient  funds  to  make  all  necessary  extensions.  The 
Commission  has  had  trouble  in  ordering  extensions  be- 
cause of  the  inability  of  the  companies  to  obtain  additional 
funds  by  bond  issues.  Thus  it  must  be  apparent  that  the 
main  principle  back  of  regulation  of  stocks  and  bonds  is 
that  capitalization  shall  equal  or  closely  approximate  the 
amount  that  has  been  wisely  and  economically  expended 

1  In  re  Southern  Wisconsin  Railway  Co.,  1907,  2  W.  E.  C.  R.,  52. 


240     RAILROADS  AND  PUBLIC  UTILITIES 

in  the  development  of  the  plant.  Of  course,  such  legis- 
lation is  a  blow  to  the  promoter  and  speculator,  who  bond 
plants  for  full  value,  develop  the  property  to  pay  profits 
on  excessive  capital  stock  and  then  unload  the  plant  upon 
the  unsuspecting  public. 

Of  the  two  methods  of  stock  and  bond  regulation — 
strict  supervision  with  a  commission  authorizing  all  issues, 
or  an  investigation  by  a  commission  for  purposes  of  pub- 
licity with  power  to  prosecute  for  violations — the  former 
has  been  adopted  in  Wisconsin.  The  latter  plan  gives  the 
utility  larger  discretion  in  its  corporate  management. 

The  Wisconsin  law  applies  to  all  railroads  and  public 
utilities  issuing  securities  payable  at  periods  more  than 
one  year  after  the  date  of  issue.1  It  provides  that  the 
purposes  for  which  such  securities  may  be  issued  are:  or- 
ganization expenses,  construction  or  improvements ;  the  re- 
funding of  its  legal  obligations ;  raising  its  stock  and  bond 
issues  when  below  the  actual  value  of  the  property  to  an 
amount  equal  to  such  valuation  and  for  certain  special  rail- 
road purposes.  No  stocks  or  bonds  shall  be  issued,  except 
in  consideration  of  money,  labor  or  property  at  its  true 
value  as  determined  by  the  Commission.  Stocks  must  be 
sold  at  par  and  bonds  at  not  less  than  75  per  cent  of 
the  face  value.  The  law  does  not  recognize  the  principle 
of  stock  issues  without  monetary  value,  although  this  plan 
is  biennially  advocated  before  the  legislature  and  has  the 
approval  of  Chairman  Roemer  of  the  Wisconsin  Commis- 
sion.2 This  principle,  however,  is  as  vigorously  opposed 
by  Commissioner  Erickson.3 

An  attempt  is  made  in  the  Wisconsin  statute  to  correct 
the  evils  due  to  large  bond  issues,  and  small  stock  issue, 


JSec.  1753-22,  Revised  Statutes  of  1913. 

2  Commissioner  Roemer,  Address  before  Southern  Gas  Convention, 
Mobile,  Ala.,  Apr.  23,  1914. 

8  Commissioner  Erickson,  Address  at  Madison,  Wis.,  Jan.,  1909. 


REGULATION  OF  STOCKS  AND  BONDS    241 

which  leave  the  management  of  the  properties  largely  in 
the  hands  of  stockholders  who  have  little  property  interest 
in  the  utility.  Such  conditions  lead  many  times  to  an  un- 
scrupulous management  of  the  properties,  with  a  diversion 
of  funds  from  their  proper  uses.  To  correct  this  the  act 
provides  that  the  bonds  shall  bear  a  reasonable  proportion 
to  the  stock,  leaving  the  question  of  ratio  to  be  determined 
by  the  Railroad  Commission  after  investigation.  Usually 
about  a  one-third  stock  and  a  two-thirds  bond  issue,  to- 
gether approximating  the  value  of  the  property,  is  al- 
lowed, although  each  case  depends  entirely  on  its  own 
peculiar  circumstances. 

Stocks  and  bonds  can  be  issued  only  upon  authority  of 
the  Railroad  Commission.  The  application  made  by  the 
railroad  or  utility  sets  forth  the  amount,  character  and 
terms  of  the  issue,  the  purposes  for  which  it  is  to  be 
used  and  a  complete  statement  of  the  financial  situation  and 
history  of  the  corporation  in  such  detail  as  the  Commis- 
sion may  require.  The  proceeds  of  such  issues  can  be 
used  for  no  other  purposes  than  those  specified  in  the  cer- 
tificate. The  aim  of  such  regulation  is  to  put  a  dollar's 
worth  of  property  back  of  every  dollar  of  securities  au- 
thorized. 

If  a  utility  is  reorganized  or  several  utilities  are  con- 
solidated, a  valuation  is  made  by  the  Commission  and  the 
new  stock  and  bond  issues  shall  not  exceed  the  amount  of 
the  value  fixed.  The  motive  back  of  this  provision  is  thus 
explained  by  Commissioner  Erickson: 

Another  evil  fostered  by  the  unlimited  right  to  issue x  securi- 
ties, is  the  unnecessary  and  economically  unwise  consolidation  of 
public  utility  plants  under  one  management.  Consolidations  of 
operating  properties  are  sometimes  a  very  prudent  and  econom- 

1  Erickson,  ' '  Kegulation  of  Public  Utilities, ' '  Journal  of  the 
Western  Society  of  Engineers,  XVIII,  414. 


242     RAILROADS  AND  PUBLIC  UTILITIES 

ieal  move,  but  there  are  times  when  consolidations  are  effected 
with  a  view  solely  to  profit  on  the  pai*t  of  those  promoting  the 
consolidation  and  it  is  schemes  such  as  this  that  are  now  referred 
to.  The  opportunity  to  combine  two  corporations  and  issue  se- 
curities exceeding  the  combined  value  of  their  properties,  is  so 
tempting  that,  in  the  absence  of  the  regulation  of  security  issues, 
public  utility  managers  have  often  availed  themselves  of  it  in  the 
past,  much  to  the  detriment  of  the  public. 

In  the  determination  of  this  value  as  a  basis  for  security 
issues  the  Commission  is  directed  by  the  statute  not  to  ap- 
praise a  franchise  "at  any  greater  sum  or  value  than  the 
sum  paid  therefor  into  the  public  treasury  of  the  state  or 
the  municipality  granting  the  same." 

But  the  power  of  the  Commission  extends  beyond  the 
authority  to  permit  issues  to  he  made.  It  is  also  clothed 
with  the  power  to  investigate  how  the  money  received  from 
the  securities  has  been  expended  and  whether  it  has  been 
used  for  the  purposes  specified  in  the  certificate  authorizing 
the  issue.  Stock,  bond  or  scrip  dividends  are  prohibited, 
except  such  as  may  be  authorized  by  the  Commission  for 
the  purpose  of  harmonizing  the  value  of  the  property  and 
the  amount  of  securities  outstanding. 

It  would  seem  that  in  view  of  the  great  variation  of 
circumstances  under  which  security  issues  are  marketed, 
the  lawful  price  of  the  securities  should  not  be  permanently 
fixed  at  a  single  point,  but  should  be  subject  to  designation 
by  the  Commission  in  each  case.  Thus  the  market  and 
other  conditions  existing  at  the  time  could  be  fully  recog- 
nized in  the  determination  of  the  price.  At  present,  a 
6-per-cent  bond  is  permitted  to  be  sold  at  as  heavy  a 
discount  as  a  4-per-cent  bond,  though  the  rate  of  interest 
on  the  bond  should  be  one  of  the  leading  factors  in  de- 
termining the  proper  amount  of  discount.  In  the  case  of 
stock,  the  necessity  for  some  flexibility  in  the  selling  price 
is  sometimes  even  more  urgent  than  in  the  case  of  bonds. 


REGULATION  OF  STOCKS  AND  BONDS    243 

On  the  one  hand,  a  company  whose  stock  is  selling  in  the 
open  market  above  par  should  not  be  allowed  to  put  out 
new  stock  at  par,  since  the  difference  between  the  par 
value  and  the  market  value  constitutes  a  bonus  to  the  buyer 
of  the  new  stock.  A  single  example  will  illustrate.  The 
Chicago,  Milwaukee  &  St.  Paul  Railway  since  1903  has  is- 
sued about  $90,000,000  of  common  stock  to  its  stockholders 
at  par,  when  this  stock  was  selling  on  the  exchanges  at  not 
far  from  $200  a  share,  or  double  its  par  value.  The  pre- 
ferred stock  paid  annual  dividends  of  8  per  cent  and  the 
common  stock  7  per  cent.  Thus  in  the  past  ten  years  be- 
sides the  regular  dividends  the  holders  of  stock  have  re- 
ceived stock  dividends  amounting  to  from  75  per  cent  to 
100  per  cent  of  their  holdings.  During  this  time  the  com- 
pany was  building  a  new  line  to  the  Coast  and  the  money 
obtained  from  selling  the  common  stock  at  par  was  used 
for  the  purpose  of  new  construction.  Had  there  been  a 
national  law  on  the  subject  compelling  the  company  to  sell 
its  stocks  at  the  market  price,  nearly  double  the  amount 
of  money  would  have  been  received  for  the  same  securities. 
Such  dealings  inflate  the  cost  of  the  road  and  the  sum  total 
of  the  company's  securities.  From  the  point  of  view  of 
the  investor  there  are  more  reasons  why  stocks  should  be 
regulated  than  bonds.  The  latter  are  handled  through  trust 
companies,  banks  and  large  holding  corporations,  who  see 
to  it  that  the  value  is  back  of  the  bonds.  These  issues 
usually  bear  a  fixed  rate  of  interest.  With  stocks  it  is  dif- 
ferent. Unregulated  stocks  easily  lend  themselves  to  all 
sorts  of  unscrupulous  practices  for  which  the  public  must 
often  suffer.  On  the  other  hand,  in  the  case  of  some  newly 
organized  companies,  the  raising  of  money  by  the  sale  of 
stock  at  its  par  value  is  a  very  difficult  task,  and  some 
relaxation  from  the  present  rigid  price  standard  may  be 
desirable.  Such  relaxation  should  not,  of  course,  go  to 
the  extent  of  sanctioning  the  issuance  of  stock  as  a  pure 


244     RAILROADS  AND  PUBLIC  UTILITIES 

bonus  or  without  any  substantial  payment  into  the  com- 
pany's treasury;  but  stock,  like  bonds,  should  perhaps  be 
subject  to  such  reasonable  discounts  as  the  Commission 
may  find  to  be  required  by  the  exigencies  of  the  par- 
ticular case  in  hand. 

"One  of  the  principal  arguments  in  favor  of  exempt- 
ing stocks  from  regulation  is  that  such  exemption  is  neces- 
sary in  order  to  secure  the  necessary  capital  for  such  en- 
terprises and  the  only  way  in  which  promoters  can  be 
assured  of  reaping  many  profits,"  said  Commissioner 
Erickson,  in  answering  some  of  the  critics  of  regulation. 
"These  propositions,  however,  are  not  sustained  by  facts. 
Experience  upon  this  point  shows  that  the  bona  fide  inves- 
tor, who  in  the  end  furnishes  the  capital,  is  much  more 
ready  to  place  his  money  in  public  utilities  in  states  which 
have  adopted  reasonable  systems  of  regulation  than  in 
states  where  there  is  no  such  regulation.  In  fact,  the  ef- 
fect of  such  regulation  is  to  increase  the  supply  of  such 
investment  funds  and  to  decrease  interest  rates  thereon." 

Opponents  of  state  security  regulation  of  the  kind  now 
in  effect  in  Wisconsin  favor  the  enactment  of  laws  that 
will  merely  give  such  wide  publicity  to  proposed  security 
issues  as  to  nullify  any  attempts  at  watering.1  They  also 
contend  that  the  issuing  of  securities  under  such  a  law 
as  the  present  Wisconsin  law  will  validate  past  issues. 
Upon  this  ground  former  Commissioner  Roemer,  who  holds 
an  opposite  view  from  that  of  Commissioner  Erickson, 
believes  that  "the   English2   Companies'   act  is  a  much 

1  Thomas  Mulvey,  Under-Secretary  of  State  of  Canada,  ' '  Com- 
pany Capitalization  Control, ' '  Eeport  on  existing  legislation  in  Can- 
ada and  elsewhere,  1913,  XXXV  et  seq.  This  volume  also  contains 
the  report  of  the  Federal  Securities  Commission  and  is  the  most 
comprehensive  presentation  of  the  subject  that  has  come  to  the  au- 
thor's attention.  See  also,  La  Follette's  Weekly  for  views  of  Senator 
La  Follette,  Jan.  31,  1914. 

2  Ibid..  XXXVII. 


REGULATION  OF  STOCKS  AND  BONDS    245 

wiser  measure  for  the  regulation  of  the  issues  of  corporate 
securities  than  any  of  the  laws  or  proposed  measures  that 
have  come  to  my  attention  in  this  country." 

The  argument  that  strict  regulation  gives  unwarranted 
approval  to  past  issues  that  may  ultimately  embarrass  the 
Commission  when  a  rate  question  arises  is  answered  by 
John  M.  Eshleman,  former  president  of  the  Railroad  Com- 
mission of  California,  who  is  recognized  as  one  of  the 
leading  exponents  of  the  present  Wisconsin  stock  and  bond 
law.  After  answering  many  of  the  objections  raised  against 
regulation,  he  says: 

As  regards  securities  that  are  approved  by  the  state,  under3 
the  proper  precaution  pointed  out  herein,  I  can  give  myself  no 
great  concern  as  to  the  effect  of  such  approval.  If  the  public 
utility  commission  does  its  duty,  the  approved  securities  should  be 
good  and  if  it  sees  to  it  that  the  proceeds  are  honestly  invested 
in  the  property  and  takes  care  that  securities  approved  are  not 
diluted  through  participation  with  other  securities  not  approved, 
then  why  should  not  these  securities  be  recognized  in  the  rates? 
But  regardless  of  any  difficulties  that  confront  those  empowered 
to  regulate  securities,  the  condition  under  regulation  is  so  im- 
measurably better  for  utility  patron  and  investor,  as  far  as  can 
now  be  determined,  that  I  am  at  a  loss  to  understand  the  Jere- 
miah-like attitude  of  those  who  some  years  ago  indulged  in  the 
same  childlike  faith  in  the  efficacy  of  regulation  that  some  of 
the  rest  of  us  now  display.  But  I  could  the  better  understand 
and  perhaps  agree  with  those  formerly  urging  regulation  and  now 
so  fearful  of  its  results,  if  they  would  point  out  wherein  it  had 
failed  where  effectively  applied,  instead  of  contending  that  it  may 
produce  results  that  have  not  yet  come  upon  us.  The  evils  of 
overcapitalization  are  familiar  to  us  all.  The  logic  of  regulation 
seems  to  me  to  be  irrefutable.  When  properly  carried  on  it  is 
certainly   preferable   to   the   former   condition,   and   until  some- 


3 John  M.  Eshleman,  "Control  of  the  Issuance  of  Securities," 
The  Annals  of  the  American  Academy  of  Political  and  Social  Sci- 
ence, LIII,  160. 


246     RAILROADS  AND  PUBLIC  UTILITIES 

thing  more  substantial  than  mere  fears  of  results  that  cannot 
be  shown  as  yet  to  have  materialized  is  urged  against  the  pro- 
priety of  regulating  securities,  such  regulation  certainly  should 
not  be  rejected  and  a  reversion  to  former  admittedly  bad  con- 
ditions invited. 

A  New  York  court  *  has  taken  a  like  view  in  declaring: 
that  the  authorization  by  the  Commission  does  not  carry 
with  it  guarantee  "that  the  property  back  of  the  stock  is 
worth  the  amount  thereof."  Chairman  Roemer  does  not 
consider  this  decision  conclusive. 

Under  the  Wisconsin  law  the  penalty  for  issuing  stock 
or  bonds  without  authorization  ranges  from  $500  to  $10,000. 
Certificates  of  preferred  and  common  stock  must  state  on 
their  face  the  privileges  granted  to  preferred  stock  and 
no  change  or  amendment  of  the  company's  articles  of  in- 
corporation with  reference  to  preferred  stock  can  be  made 
without  a  two-thirds  vote  of  all  outstanding  stock,  pre- 
ferred and  common.  Formerly  the  fee  charged  by  the 
Commission  for  authority  to  issue  bonds  or  notes  was  $1 
for  each  $1,000  of  securities.  The  1913  legislature  pro- 
vided a  graduated  rate  which  goes  as  low  as  10  cents  for 
bond  or  note  issues  over  $500,000.  There  is  no  fee  for 
stock  issues. 

A  summarization  of  stock  issues  by  the  Commission  in 
the  past  three  years  follows: 

1  People  ex  rel.  Westchester  Street  Railway  Co.  v.  Public  Service 
Commission  of  the  Second  District  of  New  York,  158  App.  Div.  251, 
143  N.  Y.  Supp.  148,  decided  by  Appellate  Division  of  the  Supreme 
Court  of  New  York,  July  8,  1913.  Extract  from  opinion  by  J.  Kel- 
logg, N.  Y.  Supp.,  152. 

' '  The  authorization  by  the  Commission  to  an  issue  of  stock  does 
not  carry  with  it  the  certificate  of  the  state  or  the  Commission  that 
the  property  back  of  the  stock  is  worth  the  amount  thereof.  It  indi- 
cates merely  that  the  stock  is  issued  for  proper  purposes,  and,  if  for 
property  purchased,  that  it  was  an  honest  purchase  and  for  the 
necessary  and  proper  use  of  the  corporation. ' ' 


V/ 


REGULATION  OF  STOCKS  AND  BONDS     247 


Total  Stock  and  Bond  Issues  for  Three  Fiscal  Years  1911-1914 

"Bonds"  Include  Notes 


Rail- 
roads 

Public 
utilities 

Combined 
companies* 

Total 

$  7,067,450 
658,011,200 

$  5,327,678 
8,536,917 

$  5,531,000 
18,842,000 

$17,926,128 
685,390,117 

Bonds,  total 

Total  Securities . . . 

Stock  for  refunding .... 
Bonds  for  refunding .  .  . 

665,078,650 

450,000 
361,025,800 

13,864,595 

1,278,475 
1,556,000 

24,373,000 

650,000 
7,358,000 

703,316,245 

2,378,475 
369,939,800 

Total  for  refunding 
Net   amount    for    new 
purposes , 

361,475,800 
303,602,850 

2,834,475 
11,030,120 

8,008,000 
16,365,000 

372,318,275 
330,997,970 

*  Combined  companies  operating  both  a  street  railway  and  a  public  utility  plant. 

Thus  far  none  of  the  evils  threatened  under  security- 
regulation  has  appeared  in  Wisconsin.  Capital  has  entered 
the  field  as  freely  as  desired  and  interest  rates  have  not 
been  exorbitant.  Because  the  Wisconsin  law  follows  the 
strict  regulation  method,  no  attempt  will  be  made  to  de- 
velop the  idea  back  of  the  theory  for  less  stringent  regula- 
tion. The  footnotes  refer  the  reader  to  publications  where 
the  arguments  in  support  of  this  view  are  to  be  found. 

Under  a  separate  statute  enacted  in  1913  the  Commis- 
sion is  given  the  power  to  administer  the  so-called  "Blue 
Sky  law, ' ' x  which  regulates  the  sale  of  securities  of  other 
concerns  than  railroads  or  public  service  corporations.  The 
law  exempts  all  classes  of  government  securities;  securities 
listed  on  the  New  York  and  Chicago  exchanges  or  other 
exchanges  approved  by  the  Commission ;  securities  of  Wis- 
consin banks  and  other  trust  companies  and  of  domestic 
corporations  organized  with  $25,000  capital  stock  or  less. 
Dealers  are  required  to  be  licensed  by  the  Commission  and 

1  Sec.  1753-48-53,  Revised  Statutes  of  1913. 


248     RAILROADS  AND  PUBLIC  UTILITIES 

must  furnish  complete  information  to  the  Commission  re- 
garding the  securities  offered  for  sale.  While  the  law  has 
done  much  good,  such  legislation  can  never  reach  its  high- 
est efficiency  until  all  other  states  enact  similar  statutes. 
Many  concerns  evade  the  law  by  operating  in  bordering 
states  and  mailing  their  literature  to  lists  in  Wisconsin. 
Deals  consummated  through  the  mails  when  the  operations 
are  directed  in  another  state  cannot  be  reached  by  such 
legislation. 

Within  the  state  the  effect  of  the  law  has  on  the  whole 
been  wholesome. 


CHAPTER    XVII 

WATER-POWER    LEGISLATION 

The  placing  of  the  water  powers  of  the  state  under  the 
control  of  the  Railroad  Commission  is  but  an  integral  part 
of  the  conservation  movement  that  obtained  impetus  in  the 
nation  by  the  calling  of  the  conference  of  governors  at  the 
White  House,  May  13-18,  1908,  and  in  the  state  through 
the  appointment  of  a  conservation  committee  by  Governor 
James  0.  Davidson  in  July  following.  This  state  commit- 
tee  made  an  extensive  investigation  of  the  subject  of  water 
powers,  forests  and  soils.  It  recommended  that  hereafter 
special  franchises  for  water-power  development  be  not 
granted,  but  "that  a  general  statute  be  framed  upon  the 
subject  and  the  granting  of  franchises  be  given  to  some 
Commission."  The  legislature  of  1909,  following  this  rec- 
ommendation, declined  to  allow  any  franchises  for  water- 
power  development,  but  appointed  a  special  committee  to 
investigate  the  subject  and  draft  bills  for  submission  at 
the  1911  session  of  the  legislature.  Water-power  legisla- 
tion now  became  a  subject  of  vital  legislative  importance.1 

1  There  were  other  factors  that  contributed  largely  to  the  legis- 
lative interest  in  water-power  control.  In  1910,  President  Charles 
R.  Van  Hise,  of  the  University  of  Wisconsin,  pointed  out  that 
at  the  present  time  26,000,000  horse  power  in  the  United  States 
is  developed  by  coal,  of  which  according  to  leading  authorities, 
15,000,000  horse  power  could  be  more  economically  developed  by 
water,  at  an  economic  saving  of  about  $12  per  annum,  or  $180,- 
000,000  a  year.  He  said  that  for  every  horse  power  developed  by 
water  ten  tons  of  coal  are  saved,  making  it  possible  to  reserve 
150,000,000  tons  of  coal  annually,  or  about  one-third  of  the  output 

249 


250     RAILROADS  AND  PUBLIC  UTILITIES 

It  is  not  the  purpose  of  this  chapter  to  develop  the  his- 
tory of  the  conservation  movement  in  Wisconsin,  except 
briefly  as  it  applies  to  the  additional  duties  imposed  upon 
the  Railroad  Commission  by  the  enactment  of  the  water- 
power  law.  Prior  to  1907  the  legislature  had  from  time 
to  time  granted  franchises  for  the  development  of  water 
powers  without  charge.  Most  of  these  franchises  contained 
the  specific  provision  permitting  the  legislature  to  alter  or 
repeal  them  at  any  time  and  many  carried  the  power  of 
eminent  domain  necessary  to  overflow  lands.  The  court 
had  sustained  the  mill  dam  act  of  1840  on  the  ground 
that  the  land  flooded  by  virtue  of  it  was  devoted  to  public 
use.  Dr.  Charles  R.  Van  Ilise,  Chairman  of  the  Wisconsin 
Conservation  Commission,  contended  that  "the  fact  that 
the  state  has  granted  the  right  of  eminent  domain  to  indi- 
viduals and  corporations  would  seem  to  make  it  reasonable 
to  impose  special  conditions,  including  charges  for  special 
concessions."  1  Miles  C.  Riley  made  a  special  investigation 
for  the  legislative  water-power  committee  and  found  that 
of  the  665  water-power  grants  prior  to  1907,  "224  permits 
were  granted  to  improve  navigation  and  to  facilitate  log 
driving,  or  both ;  227  for  hydraulic  purposes ;  79  to  f acili- 

in  the  United  States,  in  addition  to  the  $180,000,000  saved  through 
substitution.  As  indicating  the  consolidation  of  the  large  water-power 
interests,  he  quoted  Herbert  Knox  Smith,  Commissioner  of  Corpora- 
tions, to  the  effect  that  thirteen  companies  control  1,825,000  horse 
power,  or  more  than  one-third  of  the  entire  development  of  the  United 
States.  Commenting  on  the  future  of  water-power  control  and 
development  in  the  United  States,  Dr.  Van  Ilise  said:  "When  a 
century  or  two  centuries  hence  the  amount  of  coal  has  become  di- 
minished in  quantity,  and  has  become  higher  in  price,  none  can  esti- 
mate the  importance  to  the  nation  of  this  water  power.  Certain  it 
is  that  in  the  future,  he  who  controls  this  100,000,000  or  200,000,000 
(estimated  possible  development)  horse  power  controls  the  industries 
of  the  nation. ' '  Such  information  had  a  tremendous  effect  in  mold- 
ing public  opinion  in  favor  of  the  passage  of  a  stringent  law.  See 
Van  Hise,  Conservation  of  Natural  Eesources,  1910,  118-185. 
1  Van  Hise,  Conservation  of  Natural  Eesources,   159. 


WATER-POWER  LEGISLATION  251 

tate  log  driving  and  for  hydraulic  purposes;  and  63  for 
other  purposes,  viz.,  to  feed  canals,  for  pisciculture,  to  cre- 
ate ponds,  to  flow  cranberry  marshes,  for  the  '  public  good, ' 
for  general  municipal  purposes,  and  include  44  grants  in 
which  no  purpose  is  specified. "  *  Of  the  total  of  665 
grants,  326  carried  the  power  of  eminent  domain,  325  con- 
tained provisions  permitting  the  legislature  to  alter  or  re- 
peal, and  31  were  limited  in  time. 

The  state  conservation  commission  found  that  in  1910, 
according  to  Professor  L.  S.  Smith,  "the  water  power  de- 
veloped in  the  state  was  183,106  horse  power."  Dean  E. 
A.  Birge  estimated  that  undeveloped  water  power  for  the 
minimum  flow  of  the  year  was  more  than  350,000  horse 
power,  ' '  and  the  amount  which  would  be  available  through 
six  months  not  more  than  about  650,000  horse  power."2 
Thus  about  two-thirds  of  the  water  powers  of  the  state 
are  undeveloped.  The  number  of  potential  horse  power 
may  be  increased,  however,  by  the  creation  of  systems  of 
reservoirs  at  the  headwaters  of  water-power  streams.  Such 
systems  have  been  established  on  the  Wolf  and  Wisconsin 
rivers.3  The  investigations  recently  made  by  the  Railroad 
Commission  indicate  that  most  of  the  larger  powers  have 
been  developed  and  that  the  undeveloped  powers  are  on 
smaller  falls.4 

Professor  Smith's  report  for  the  Federal  Conservation 
Commission,  May,  1908,  shows  that  of  the  developed  pow- 
ers in  Wisconsin,  43  are  used  to  operate  paper  mills ;  218, 
flour,  grain  and  feed  mills ;  45,  saw  mills  and  planing  mills ; 
43,  electric  light  and  power  plants ;  22,  woolen  mills,  manu- 

1  Ecport  of  the  Legislative  Committee  on  Water  Powers,  etc., 
1910,  Part  I,  5. 

2  Third  Biennial  Eeport  of  the  Conservation  Commission  of  Wis- 
consin, 1. 

3  Ch.  649,  Laws  of  1913  and  Ch.  335,  Laws  of  1907. 

4  Senators  Husting  and  Krumrey,  Special  legislative  report  for 
an  estimate  of  the  pecuniary  value  of  Wisconsin  water  powers,  12-15. 


252     RAILROADS  AND  PUBLIC  UTILITIES 

facturing  yarn  and  carding ;  15,  machine  shops ;  and  one  or 
more  each  for  the  manufacturing  of  brick,  bridges,  mill 
elevators,  wooden  ware,  furniture,  hubs  and  spokes,  hosiery, 
nails,  beehives,  boxes,  brushes,  sash  and  doors,  cutlery, 
scales,  cotton  goods,  creameries,  linen  goods,  and  the  float- 
ing of  logs.  This  list  of  enterprises  operated  by  water 
power  illustrates  the  important  use  to  which  Wisconsin 
water  powers  have  already  been  devoted.  The  earliest 
development  of  the  remaining  powers,  consistent  with  the 
protection  of  public  interests,  as  a  conservation  movement 
to  save  the  coal  and  wood  supply  of  the  state,  is  urgent. 

Whether  the  state  owned  these  water  powers,  or  could 
only  control  them  subject  to  the  terms  of  the  franchise 
granted,  was  a  mooted  question  that  had  never  been  di- 
rectly before  the  supreme  court.  The  water-power  inter- 
ests denied  the  power  of  ownership  and  questioned  the 
right  of  control.  But  as  the  states  of  North  Dakota,  Wash- 
ington, Wyoming,  Idaho,  and  California  had  declared  the 
use  of  the  energy  in  falling  water  in  navigable  streams  to 
be  a  public  right,  a  law  was  enacted  by  the  1911  legislature 
predicated  on  this  principle.  The  state  virtually  claimed 
the  ownership  of  all  the  water  powers  in  Wisconsin,  de- 
veloped and  undeveloped,  and  provided  for  the  issuing 
of  franchises  through  the  Railroad  Commission,  all  grants 
to  be  subject  to  stringent  regulation.  This  act  (Chapter 
652,  Laws  of  1911)  was  immediately  brought  before  the 
supreme  court,  which  declared  it  invalid.  It  held  that 
the  right  of  the  riparian  owner  to  use  the  water  of  the 
river  on  his  own  land  "is  unquestionably  a  private  right 
appurtenant  to  the  riparian  land."  The  court  further 
said: 

Where  the  ownership  of  the  bank  is  essential  x  to  the  con- 
struction of  a  dam  or  the  creation  or  development  of  a  water 


1  Water  Power  Cases,  148  Wisconsin  Eeports,  149-150. 


WATER-POWER  LEGISLATION  253 

power,  the  state  is  as  helpless  to  use,  sell  or  lease  such  right 
without  condemnation  or  compensation  as  the  riparian  owner  is 
to  intrude  into  the  navigable  stream  without  consent  of  the  state. 
It  requires  the  concurrence  of  the  riparian  owner  and  the  state 
in  such  case  to  make  the  water  power  efficient  and  this  right  of 
the  riparian  owner  to  refuse  to  concur  and  stand  out  for  compen- 
sation in  the  case  mentioned,  is  a  private  property  right  and 
often  gives  to  such  land  its  chief  value.  The  state  may  refuse 
its  permission  to  the  riparian  owner  to  build  a  dam  and  may  at- 
tach conditions  to  its  consent  such  as  the  height,  strength,  mode 
of  construction,  etc.,  of  the  dam,  and  perhaps  other  conditions, 
but  it  may  not  seize  upon  this  right  without  compensation  and 
use  it  or  sell  it  or  lease  it  to  another.  It  cannot  authorize  the 
use  and  enjoyment  of  this  right  by  a  person  not  a  riparian  owner 
for  a  private  purpose  without  condemnation  and  compensation 
to  the  riparian  owner.  The  act  in  question  attempts  to  deprive 
the  owners  of  improved  riparian  land  and  of  the  resulting  water 
power  and  owners  of  unimproved  riparian  land  with  its  appur- 
tenant water-power  privileges  and  advantages,  of  property  with- 
out due  process  of  law;  it  attempts  to  authorize  the  taking  of 
private  property  for  private  purposes;  and  it  attempts  to  take 
property  without  just  compensation.  The  act  in  question,  in  the 
particulars  mentioned,  is  inconsistent  with  the  paramount  com- 
mands of  the  state  and  of  the  Federal  Constitution  applicable  to 
the  same  facts  and  conditions.  Hence,  we  cannot  recognize  it  as 
law. 

The  court  had  now  marked  the  line  of  demarcation 
upon  which  a  new  law  could  be  framed.  Apparently  re- 
solving every  possible  advantage  in  favor  of  the  public,  a 
special  committee  of  the  senate,  with  Senator  Paul  0.  Hust- 
ing  as  chairman,  submitted  a  new  bill  to  the  legislature  in 
1913,  which  was  enacted  after  a  spectacular  fight  before 
committees  and  the  legislature,  the  water-power  interests 
opposing  it  at  every  step.  This  brief  history  of  water- 
power  legislation  in  the  state,  together  with  the  announced 
attitude  of  the  supreme  court,  is  prerequisite  to  an  un- 


254     RAILROADS  AND  PUBLIC  UTILITIES 

derstanding  of  the  provisions  of  necessity  embodied  in  the 
1913  law  that  is  now  being  administered  by  the  Railroad 
Commission. 

Even  in  the  new  law,  however,  the  legislature  gave  up 
the  claim  of  proprietorship  of  the  water  powers  reluctantly. 
While  recognizing  the  new  powers  to  be  developed  as  public 
utilities,  subject  to  the  same  terms  as  the  other  public  utili- 
ties of  the  state,  the  law  says  that  "nothing  contained  in 
this  chapter  shall  be  construed  as  conferring,  creating  or 
admitting,  on  the  part  of  the  state,  the  existence  of  any 
private  property  in  water,  or  as  requiring  the  state  or  any 
authorized  state  agency,  to  pay  any  compensation  at  any 
time  for  water  or  the  use  of  water  taken. ' ' 1 

The  administration  of  the  water-power  law  is  lodged 
with  the  Railroad  Commission.  Franchises  are  granted 
upon  finding  of  facts  by  that  body,  a  function  heretofore 
exercised  solely  by  the  legislature.  Specific  directions  as 
to  the  conditions  under  which  franchises  shall  issue  are 
laid  down  in  the  law.  This  franchise  in  effect  makes  future 
water-power  developments  public  utilities,  subject  to  the 
same  restrictions,  as  to  rates,  service,  etc.,  as  are  applied 
to  railroads  and  public  utilities  of  the  state.  Acceptance 
of  the  public  utility  feature  of  the  law  by  the  applicant 
is  coupled  with  the  franchise  requirements. 

The  water  powers  of  the  state  are  divided  into  two 
classes — developed  and  undeveloped.  The  supreme  court 
decision  made  it  evident  that  little  can  be  done  with  the 
powers  already  developed,  except  subjecting  them  through 
Commission  supervision  to  the  general  police  powers  as  to 
safety,  etc.  This  class  is  not  recognized  as  public  utilities, 
and  is  free  from  regulation  in  this  regard. 

Undeveloped  powers  are  again  divided  into  two  classes 
by  the  statute — those  with  a  possible  development  of  over 

'Water  Powers  Act,  Ch.  755,  Laws  of  1913. 


WATER-POWER  LEGISLATION  255 

250  horse  power  and  those  with  a  development  under  250 
horse  power.  This  first  class,  which  includes  the  larger 
undeveloped  powers,  is  subjected  directly  to  all  of  the 
provisions  of  the  Public  Utility  Law,  while  the  latter  class 
is  given  a  wider  latitude  of  freedom. 

Certain  control,  however,  is  to  be  exercised  by  the  Com- 
mission over  all  present  and  future  water-power  develop- 
ments in  the  state.  "For  the  personal  safety  and  the  pro- 
tection of  property  from  damage/'  the  Commission  is  to 
supervise  the  safety  and  construction  of  dams,  reservoirs, 
etc.  In  recent  years  the  police  power  of  the  state  seems 
to  have  developed  in  two  different  fields,1  both  closely  asso- 
ciated in  the  principles  involved,  though  somewhat  dis- 
similar in  the  ends  to  be  accomplished.  The  first  deals 
directly  with  the  safety  and  protection  of  life  and  property ; 
the  second  with  the  economic  problems  presented  in  the 
regulation  of  monopolistic  enterprises.  The  first  class  of 
regulation  has  now  been  extended  generally  over  the  busi- 
ness and  industrial  field,  to  enterprises  that  are  not  mo- 
nopolistic. 

Included  in  the  first  and  the  more  general  powers  of 
supervision  applicable  to  all  water  powers  are  provisions 
requiring  the  Commission  to  gather  full  data  regarding  the 
safety  of  present  developments ;  the  making  of  a  complete 
hydrographic  survey  of  the  navigable  streams  of  the  state, 
including  both  developed  and  undeveloped  sites ;  the  deter- 
mination and  marking  of  high  and  low  water  levels  and 
the  obtaining  of  records  of  stream  flow.  Future  dams  are 
to  be  constructed  on  sites  approved  by  the  Commission. 
It  is  also  authorized  to  order  the  improvement  or  strength- 
ening of  any  existing  dam  and  may  even  draw  off  the 
water,  if  in  its  judgment  public  safety  requires  it.    It  may 

1  Commissioner  Erickson,  Unpublished  address  on  the  subject  of 
Water  Powers  before  the  University  Economics  Club,  Madison,  Wis., 
May,  1914. 


256     RAILROADS  AND  PUBLIC  UTILITIES 

order  the  construction  of  chutes,  flood  gates,  booms  and 
piers,  if  deemed  necessary  to  protect  the  public  interests. 
The  breaking  of  a  large  water-power  dam  at  Hatfield, 
which  wiped  out  the  business  and  a  part  of  the  residential 
section  of  Black  River  Falls  in  1911,  is  largely  the  cause 
for  the  delegation  of  these  police  powers  to  the  Commission 
for  enforcement  and  prevention  of  future  calamity.  The 
provisions  exercised  in  this  section  of  the  law  were  dis- 
tinctly approved  by  the  supreme  court  in  its  decision  of 
the  water-power  cases.  To  defray  the  expense  of  this  in- 
spection and  administration  the  owner  of  a  dam  is  required 
to  pay  an  annual  inspection  fee  of  ten  cents  per  theoretical 
horse-power  capacity  determined  at  the  ordinary  stage  of 
water.    The  minimum  fee  is  $10  for  each  single  dam. 

The  second,  or  public  utility  field  of  regulation  is 
applicable  only  to  water  powers  to  be  developed  in  the 
future  and  not  over  powers  already  developed  under  legal 
franchises.  This  limitation  of  control  would  seem  to  be 
tempered  by  the  exigencies  of  the  supreme  court  decision. 
All  who  in  the  future  desire  to  develop  water-power  prop- 
erty must  obtain  a  franchise  from  the  Commission  which 
is  indeterminate  in  period,  "subject  to  the  right  of  the 
state  or  municipality  to  acquire  the  property  so  developed 
at  a  price  to  be  fixed  by  the  Commission  in  the  way  pre- 
scribed in  the  law." 

As  before  indicated,  both  the  law  and  the  franchise 
make  the  future  development  of  a  water  power  a  public 
utility  in  character  and  subject  to  the  same  restrictions 
as  to  rates  and  service  as  other  public  utilities  in  the 
state.1 

Under  the  provisions  of  the  law  where  the  development 
at  the  ordinary  stage  of  water  is  over  250  horse  power 
the  franchise  can  be  granted  only  to  a  corporation  organ- 

1  This  provision  was  modified  by  an  act  of  the  Legislature  in  1915, 
after  this  chapter  was  written. 


WATER-POWER  LEGISLATION  257 

ized  in  the  manner  prescribed  in  the  act,  or  to  a  municipal- 
ity. Where  the  possible  development  is  under  250  horse 
power  the  franchise  may  be  granted  to  any  individual,  firm, 
corporation  or  municipality.  The  law  is  directed  in  more 
detail  to  the  larger  developments  of  over  250  horse  power. 
Before  the  franchise  is  granted  to  the  corporations,  a  step 
that  precedes  the  issuance  of  a  certificate  of  incorporation 
by  the  Commission,  the  company  must  have  complied  with 
all  of  the  legal  requirements  of  the  water-power  law  and 
furnished  the  Commission  with  complete  data  and  profiles 
as  to  the  location  of  the  dam;  the  nearness  to  other  cities 
or  villages  and  how  they  will  be  affected ;  the  amount  of 
power  to  be  developed;  the  names  of  the  riparian  owners 
to  be  affected  with  the  flowage  privilege  and  how  navigation 
will  be  improved  by  the  structure.  If  the  Commission,  after 
a  hearing,  finds  that  the  development  will  improve  naviga- 
tion and  will  not  endanger  the  interests  of  the  public,  the 
franchise  issues.  The  acceptance  of  a  franchise  by  an 
applicant  carries  with  it  the  twofold  obligation  to  submit 
to  regulation  as  a  public  utility,  and  second,  the  acceptance 
of  the  provision  that  it  will  sell  its  properties  to  the  state 
or  municipality  under  the  terms  described  in  detail  in 
the  law.  These  corporations  are  also  made  subject  to  the 
Wisconsin  stock  and  bond  law.  The  smaller  powers,  while 
obtaining  their  franchise  from  the  Railroad  Commission, 
are  not  subjected  to  the  public  utility  provisions  as  to 
rates  and  service.  At  the  present  time  the  state  has  not 
the  right  to  own  and  operate  water  powers.  A  constitu- 
tional amendment  to  accomplish  this  is  now  pending. 

Water-power  corporations  organized  in  the  future,  with 
a  possible  development  of  250  horse  power  or  more,  must 
maintain  the  uniform  system  of  accounting  prescribed  by 
the  Commission  and  submit  for  its  approval  all  expendi- 
tures for  property  and  construction  "except  to  such  prop- 
erty as  they  may  acquire  by  eminent  domain.     These  ex- 


258     11AILR0ADS  AND  PUBLIC  UTILITIES 

penditures  for  property  and  construction  are  required  to 
be  reasonable."1  There  are  further  restrictions  extended 
to  the  larger  powers,  and  not  imposed  on  the  smaller  ones. 
All  contracts  for  the  sale  or  delivery  of  power  must  be 
submitted  to  the  Commission  for  approval  before  they  shall 
become  effective.  These  contracts  are  limited  to  a  period 
of  thirty  years  from  the  date  of  franchise,  unless  extended 
an  additional  ten  years  by  the  Commission.  At  the  expira- 
tion of  these  contracts  the  state  shall  have  the  right  to 
divert  the  sale  of  the  current,  which  the  company  may  have 
been  selling  outside  of  the  state,  to  points  within  the  state 
reasonably  near  the  development  plant.  In  the  case  of 
municipal  plants  the  statute  limits  the  contracts  to  a  term 
of  not  over  fifteen  years.  It  should  be  pointed  out,  how- 
ever, that  the  amount  of  power  generated  is  not  the  cri- 
terion as  to  whether  the  power  is  in  the  higher  class  and 
subjected  to  the  stronger  regulation.  The  possible  develop- 
ment at  an  ordinary  stage  of  water  determines  the  class, 
and  even  though  the  amount  developed  may  be  actually 
less  than  250  horse  power,  it  must  be  organized  in  the 
higher  class. 

Different  provisions  are  also  made  for  the  two  classes 
of  powers  in  the  matter  of  acquisition  by  the  state  or 
municipality.  In  the  case  of  the  developments  under  250 
horse  power  these  may  be  acquired  at  any  time  by  the  state 
or  municipality  at  a  "just  compensation"  to  be  fixed  by 
the  Commission,  excluding  any  value  for  the  franchise. 
In  the  case  of  the  larger  powers,  if  the  purchase  by  the 
state  or  municipality  takes  place  within  thirty  years  of  the 
date  the  franchise  is  issued,  the  rule  of  compensation  ap- 
plies, allowing  nothing  for  franchise  value,  just  as  in  the 
case  of  the  smaller  powers.  If  the  purchase  occurs  after 
the  thirty-year  period  the  method  of  valuation  is  described 

1Erickson,  Address  on  Water  Powers,  supra. 


WATER-FOWER  LEGISLATION  259 

by  the  statute  in  detail.  It  provides  that  the  price  paid 
shall  consist  of  the  cost  of  reproduction  of  dams  and  other 
improvements  in  the  physical  condition  at  the  time  of 
acquisition,  and  the  value  of  lands  at  the  time  the  franchise 
was  granted.  This  value  is  ascertained  by  the  Commission 
before  the  franchise  is  granted  to  develop  one  of  the  larger 
powers.  "At  the  same  time  it  must  determine  the  value  of 
the  power  site  and  in  case  of  acquisition  after  thirty  years 
no  franchise  value  shall  be  allowed  or  any  value  because 
of  the  availability  in  connection  with  water  power. ' '  Under 
the  plan  franchise  value  and  unearned  increment  are 
excluded,  if  the  state  or  municipality  exercises  its  option 
to  take  over. 

The  legislature  was  careful  to  differentiate  the  two 
methods  of  valuation,  whether  before  or  after  thirty  years. 
If  the  valuation  is  made  before  the  thirty  years  have  ex- 
pired, the  Commission  must  determine  "just  compensa- 
tion, ' '  which  includes  bona  fide  investments  that  may  have 
disappeared.  After  thirty  years  the  Commission  must 
determine  the  reproduction  cost  at  the  time  of  the  taking. 
In  the  terms  of  the  franchise  the  grantee  agrees  after  a 
lapse  of  thirty  years  to  sell  on  the  terms  set  forth  in  the 
law.  Powers  may  be  purchased  within  thirty  years  at  any 
time  upon  a  year's  notice,  and  at  any  time  after  thirty 
years.  In  case  the  properties  of  a  larger  power  may  have 
been  subjected  to  "extraordinary  calamity  occurring  at  any 
time  within  thirty  years  after  the  date  when  such  franchise 
becomes  effective,  and  causing  a  damage  in  excess  of 
twenty-five  percentum  of  the  total  value  of  all  dams,  works, 
buildings  or  other  structures  and  equivalent  used  and  use- 
ful under  the  franchise,  as  determined  by  the  Commission, 
on  application  and  hearing,  the  period  of  thirty  years 
herein  provided  for  the  acquisition  of  the  property  by  the 
state  or  any  municipality  under  the  terms  herein  specified, 
shall  be  extended  for  such  additional  period  as  may  be 


260     RAILROADS  AND  PUBLIC  UTILITIES 

equivalent  to  such  fraction  of  thirty  years  as  such  damage 
shall  bear  to  the  total  value." 

Other  sections  of  the  law  provide  that  public  utilities 
already  operating  water  powers  may  come  under  the  new 
law  and  obtain  a  new  franchise,  and  that  water  powers 
operated  without  a  franchise  will  have  to  come  under  the 
law  and  take  out  a  franchise  as  though  their  developments 
were  not  in  existence.  Otherwise  these  powers  may  be 
abated  as  a  nuisance.  To  determine  how  many  unauthorized 
developments  there  are  the  Commission  is  directed  to  ascer- 
tain the  legal  status  of  all  powers  operating  in  the  state 
and  to  report  the  facts  to  the  legislature. 

The  tremendous  work  imposed  upon  the  Commission  by 
this  law  cannot  be  expressed  in  mere  figures.  Every  water 
route  in  the  state  is  now  being  surveyed  and  its  power 
computed,  even  if  it  is  only  sufficient  to  operate  a  small 
grist  mill.  This  is  an  expensive  undertaking.  The  condi- 
tion of  the  already  constructed  dams  is  being  investigated 
to  determine  their  safety.  The  flow  of  the  streams  at 
all  seasons  of  the  year  is  also  a  subject  of  investigation. 
These  alone  are  enormous  and  costly  engineering  tasks  that 
must  be  revised  annually  as  conditions  change.  Before 
franchises  can  be  granted  to  any  general  extent  much  of 
this  information  must  be  furnished  the  Commission. 

Two  applications  have  already  been  made  for  develop- 
ments under  the  law  and  there  is  correspondence  that 
indicates  that  many  more  are  informally  pending.  How 
valuable  these  powers  are  to  become  depends  largely  upon 
their  cost  of  operation,  and  perhaps  inventions  in  other 
fields.  At  present  about  20  per  cent  of  the  energy  in 
coal  is  utilized  in  steam-power  development.  Inventions 
increasing  this  energy  two  or  fourfold  may  be  possible,  and 
the  use  of  water  power  as  an  energy  developer  would  then 
be  correspondingly  decreased,  provided  coal  does  not  be- 
come correspondingly  expensive. 


WATER-POWER  LEGISLATION  261 

"Whether  water  powers  are  profitable  or  not  depends 
very  largely  upon  the  cost  of  the  improvements  that  are 
necessary,  the  flowage,  or  amount  of  water  available  at  all 
times,  and  the  market  for  electricity,"  declares  Commis- 
sioner Erickson.1  "When  the  cost  of  the  improvements 
can  be  kept  below  $150  per  developed  horse  power,  when 
the  flowage  is  steady  enough  to  keep  the  cost  and  use  of 
auxiliary  steam  plants  down  to  a  minimum  and  when  there 
is  a  market  at  normal  prices  for  at  least  from  one-third 
to  one-half  of  the  total  possible  output  of  energy,  then 
water  powers  may  be  worth  a  great  deal.  When  on  the 
other  hand  the  cost  of  the  improvements  exceeds  the  above 
figures;  when  because  of  low  water  or  for  other  reasons 
the  steam  auxiliary  plant  must  be  relatively  large  and 
subject  to  frequent  and  interrupted  use ;  when  there  is 
but  a  limited  market  for  the  current,  then  the  cost  of 
current  generated  by  water  is  often  greater  than  the  cost 
of  current  generated  by  steam." 

That  this  law  safeguards  public  interests  that  have  been 
unseen  or  ignored  in  the  past  goes  without  question.  It 
may  prove  a  serious  handicap  to  the  "plunger"  and  the 
speculator.  It  is  framed  to  protect  the  bona  fide  investor, 
and  to  safeguard  the  more  important  interests  and  rights 
of  the  public.  As  water  powers  are  the  result  of  elements 
spread  over  a  large  territory  converging  at  one  point,  the 
direct  interest  of  the  state  would  seem  to  be  paramount,  in 
dealing  with  this  question,  to  that  of  a  selfish  private 
interest.  It  is  this  fact  that  prompts  the  treatment  legally 
of  the  new  water-power  developments  as  public  utilities. 

1  Erickson,  Address  on  Water  Powers,  supra. 


CHAPTER  XVIII 

IMPEOVEMENTS     IN     SAFETY     AND     CONVENIENCE     OF 

EAILROAD    SEEVICE 

In  the  mind  of  the  general  public  undue  importance 
is  often  attached  to  railroad  rate  reductions  and  too  little 
credit  is  given  for  service  betterments.  This  is  because 
the  latter  more  often  touches  the  needs  of  a  specific  com- 
munity instead  of  the  state  as  a  whole.  No  citizen  will 
object  to  a  rate  reduction.  Many  will  oppose  a  change 
in  service  that  goes  counter  to  their  ideas  or  that  may 
hamper  them  personally,  regardless  of  the  benefits  to  the 
majority  of  a  community.  An  illustration  of  this  is  found 
in  an  early  order  of  the  Commission  permitting  the  Illinois 
Central  road  to  operate  a  gasoline  passenger  car  on  its 
line.1  Commenting  on  the  opposition  to  this  change  in 
service  the  Commission  said: 

The  opposition  which  appears  to  have  developed  against  the 
use  of  the  motor  car  on  the  Freeport-Madison  line  is  only  another 
illustration  of  the  peculiar  fate  which  has  befallen  all  important 
developments  in  the  methods  and  means  of  transportation.  When 
the  first  important  English  railway  was  being  considered  by  par- 
liament, strenuous  objections  were  made  against  the  granting  of 
the  charter,  for  the  reason  that  the  introduction  of  the  railway 
would  destroy  the  value  of  the  landed  estates,  that  it  would  dis- 
turb game,  that  the  smoke  of  the  locomotive  would  blight  vege- 
tation, that  hens  would  cease  to  lay  eggs,  that  the  value  of  real 
estate  in  the  vicinity  of  stations  would  be  depressed,  that  it  would 

1  Wright  v.  Illinois  Central  Eailroad  Co.,  1908,  2  W.  R.  C.  E.,  279, 
289. 

262 


IMPROVEMENTS  IN  SAFETY  AND  SERVICE  263 

be  extremely  dangerous  to  ride  at  the  terrific  rate  of  thirty  miles 
an  hour,  and  that  in  general  it  would  be  much  better  for  people 
if  they  would  be  content  to  continue  to  ride  in  stage  coaches  and 
canal  boats. 

When  the  first  German  railway  was  being  seriously  consid- 
ered, so  much  opposition  developed  that  the  question  of  the  influ- 
ence of  travel  on  the  railway  was  submitted  to  a  distinguished 
medical  authority.  This  gentleman,  after  due  consideration,  sub- 
mitted a  report  in  which  he  expressed  it  as  his  opinion  that  the 
probable  effect  of  railway  travel  would  be  extremely  deleterious 
to  the  health  of  those  who  would  look  on  as  well  as  ride  in  mov- 
ing cars.  The  disease,  which  he  believed  the  introduction  of  the 
railway  would  spread,  he  designated  by  the  term  delirium  furi- 
osum.  He  thought  that  if  the  people  would  be  foolhardy  enough 
to  ride  in  cars  they  might  be  deserving  of  little  pity  if  they  should 
contract  this  terrible  disease,  but  in  his  judgment  it  was  the  duty 
of  the  state  to  protect  the  onlookers,  and  with  a  view  of  afford- 
ing this  protection  he  recommended  the  construction  of  a  higb 
and  closely  fitting  fence  on  both  sides  of  the  track. 

The  service  work  and  accomplishments  of  the  Commis- 
sion fall  into  two  natural  classes:  (1)  convenience  of 
service;  (2)  safety  of  service. 

The  former  deals  with  such  problems  as  the  stopping  of 
trains,  additional  service  requirements,  sidings  for  ware- 
houses, improved  station  facilities  and  new  depots,  sanita- 
tion of  cars  and  stations  and  car  shortages ;  the  latter  deals 
with  crossing  protections,  the  elimination  of  dangerous 
grades,  safety  of  roadbeds  and  bridges,  and  other  questions 
that  in  the  ultimate  tend  to  protect  both  property  and  life. 

One  commissioner  devotes  practically  all  of  his  time  to 
service  cases.  As  inspectors  travel  over  the  state  reports 
are  made  on  all  dangerous  crossings  and  the  lack  of  con- 
veniences to  the  traveling  public.  These  matters  are 
brought  to  the  attention  of  local  authorities.  Upon  com-, 
plaint  they  are  made  the  subject  of  hearing  and  investiga- 
tion, unless  the  improvement  is  ordered  voluntarily  upon 


264     RAILROADS  AND  PUBLIC  UTILITIES 

suggestion  to  the  railroad  from  the  Commission.  Where 
a  community  neglects  to  make  formal  complaint  the  Com- 
mission may  take  action  on  its  own  motion.  Almost  two- 
thirds  of  such  complaints  are  settled  informally.  In  other 
cases  formal  orders  are  made  requiring  the  stopping  of 
trains  at  small  stations  and  close  connections  at  junction 
points.  During  the  calendar  year  1913,  twenty-six  formal 
cases  of  this  character  were  considered  by  the  Commission. 
Ten  were  satisfied  without  a  formal  order,  seven  were 
settled  by  formal  orders  requiring  additional  service,  six 
were  dismissed  and  three  were  pending  at  the  close  of  the 
year. 

Dilapidated  stations  have  been  replaced.  Inadequate 
freight  and  passenger  depots  have  been  ordered  enlarged. 
Out  of  thirty-four  formal  station  cases  considered  during 
1913,  nine  were  satisfied  without  a  formal  order,  sixteen 
were  granted  new  stations  or  alterations  in  station  equip- 
ment, and  eight  applications,  chiefly  petitions  for  an  agent 
at  stations  already  provided  with  shelter,  were  dismissed. 
One  case  was  pending  at  the  close  of  the  calendar  year. 
The  cost  of  erecting  these  new  stations  varied  from  $100 
to  $15,000,  depending  on  the  population  of  the  community 
to  be  served.  Over  $120,000  has  been  invested  in  station 
improvements  under  orders  of  the  Commission.1 

Since  this  class  of  service  work  was  begun  by  the  Com- 

1  On  the  Chicago  &  Northwestern  Railway  new  stations  have  been 
built  in  compliance  with  orders  at  Allenville,  Clintonville,  Whitefish 
Bay,  Plymouth,  Lohrville,  Allis,  Eipon  Jet.  ( Jt.  Sta.)  ;  on  the  Chi- 
cago, Milwaukee  &  St.  Paul  Railway  new  stations  have  been  built  in 
compliance  with  orders  at  Okauchee,  Duplainville  (Jt.  Sta.),  between 
Kilbourn  and  Portage,  Ripon,  Stoughton,  Delavan,  Plymouth, 
Schleisingerville  (Jt.  Sta.),  Ripon  Jet.  (Jt.  Sta.);  on  the  Minne- 
apolis, St.  Paul  &  Sault  Ste.  Marie  Railway  new  stations  have  been 
built  in  compliance  with  orders  at  Abbotsford,  Medford,  Polly, 
Quarry,  N.  Fond  du  Lac,  Weyauwega,  Catawba,  Hillsdale,  Amery, 
Almena,  Duplainville  (Jt.  Sta.),  Schleisingerville  (Jt.  Sta.);  on  the 
Chicago,  St.  Paul,  Minneapolis  &  Omaha  Railway  new  stations  have 


IMPROVEMENTS  IN  SAFETY  AND  SERVICE  265 

mission  orders  for  the  erection  of  seven  new  stations  at  an 
aggregate  cost  of  $30,164  have  been  complied  with  by  the 
Chicago  &  Northwestern  Railway;  eight  on  the  Chicago, 
Milwaukee  &  St.  Paul  road  at  a  cost  of  $32,599 ;  twelve  on 
the  Minneapolis,  St.  Paul  &  Sault  Ste.  Marie  road  at  a  cost 
of  $20,792;  two  on  the  Chicago,  St.  Paul,  Minneapolis  & 
Omaha  road  at  a  cost  of  $3,420 ;  two  on  the  Green  Bay  & 
Western  at  a  cost  of  $1,035,  and  one  platform  and  shelter 
shed  on  the  Great  Northern  system  at  an  expense  of  $156. 
One  order  has  been  made  for  a  union  depot.1 

Miscellaneous  improvements,  such  as  side  tracks  and 
platforms,  lights  in  stations,  sanitary  toilets,  shelter  sheds, 
team  tracks  and  other  conveniences  have  been  the  subject 
of  fifteen  orders  on  the  Chicago  &  Northwestern  system, 
the  cost  of  these  betterments  aggregating"  $8,564 ;  fourteen 
orders  on  the  Chicago,  Milwaukee  &  St.  Paul  at  a  cost  of 
$17,362;  four  on  the  Minneapolis,  St.  Paul  &  Sault  Ste. 
Marie  at  a  cost  of  $1,060;  two  on  the  Chicago,  St.  Paul, 
Minneapolis  &  Omaha  lines  at  $1,957  expense ;  one  on  the 
Northern  Pacific  at  a  cost  of  $331 ;  one  on  the  Chicago, 
Burlington  &  Quincy  at  a  cost  of  $1,361,  and  one  on  the 
Chicago  &  Milwaukee  Electric  Railroad  at  a  cost  of  $330. 

Several  orders  have  been  made  for  the  construction  of 
spur  tracks  to  industrial  plants.  Sanitation  on  trains  and 
at  depots  is  the  source  of  constant  inspections  and  im- 
provements through  informal  conferences.  Even  free 
paper  drinking  cups  must  be  furnished  on  all  trains  for 
the  convenience  of  the  traveling  public.2 

The  car  shortage   evil   has  been  met  and   practically 

been  built  in  compliance  with  orders  at  South  Range,  Cobban;  on 
the  Green  Bay  &  Western  Railroad  new  stations  have  been  built  in 
compliance  with  orders  at  Forestville  and  Meehan;  on  the  Great 
Northern  Railway  a  platform  and  shelter  shed  have  been  built  in 
compliance  with  orders. 

1  Howard  Teasdale  v.  C.  §  N.  W.  and  C.  M.  $  St.  P.,  E-1416. 
'Sec.  141613m  (Ch.  750,  Laws  of  1913)  Revised  Statutes  of  1913. 


266     RAILROADS  AND  PUBLIC  UTILITIES 

solved  by  the  Commission's  constant  supervision.  Through 
letters  to  shippers  and  warnings  to  the  public  the  bulk  of 
the  lime,  cement,  lumber  and  coal  shipments  are  all  moved 
before  the  crop  season  is  at  hand.  Shippers  are  advised 
to  unload  cars  as  rapidly  as  possible  that  they  may  be 
immediately  returned  to  the  service.  Freight  movements, 
the  number  of  loaded  cars  and  their  location  at  different 
points  of  the  system  are  made  the  subject  of  daily  reports 
when  the  crops  begin  to  move.  During  the  rush  season 
shippers  are  asked  to  report  delays  in  securing  cars  imme- 
diately to  the  Commission.  One  man  at  the  Commission 
is  in  constant  communication  over  the  long-distance  tele- 
phone with  the  traffic  managers  of  the  different  roads 
directing  train  movements.  Those  who  would  ship  perish- 
able produce  such  as  cabbage  and  fruits  report  the  date 
cars  will  be  needed  several  days  in  advance,  with  the  result 
that  since  the  organization  of  the  Commission  the  strin- 
gency and  losses  through  car  shortage  have  been  kept  at 
a  minimum. 

The  safety  service  improvement  work  of  the  Commis- 
sion has  also  been  marked  by  accomplishments.  The  eco- 
nomic waste  occasioned  by  deaths  and  accidents  due  to 
railway  operation  is  appalling. 

In  the  United  States  in  1914,  165,212  employees  and 
15,121  passengers  were  injured;  3,259  employees  and  265 
passengers  were  killed ;  6,438  other  persons  were  killed  and 
10,687  injured— a  toll  of  10,302  killed  and  192,662  injured 
in  a  single  year.  Statistics  gathered  by  the  Interstate 
Commerce  Commission  show  the  following  classified  rail- 
way accidents  in  the  United  States  for  the  year  ending 
June  30,  1914. 

Over  50  per  cent  of  those  killed  in  all  railway  accidents 
in  1914  were  reported  as  "trespassers."1     The  record  of 

1  Interstate    commerce    statistics   class   persons   stealing   rides   as 
"trespassers";  the  Wisconsin  statistics  do  not. 


IMPROVEMENTS  IN  SAFETY  AND  SERVICE  267 


Total  Railway  Accidents,  Year  Ending  June  30,  1914 


Train  accidents: 

Passengers 

Trespassers 

Employees 

Other  persons 

Total 

Industrial  accidents  to  employees 

Totals 


Injured 

15,121 

6,354 

51,938 


79,388 
113,274 

192,662 


grade-crossing  accidents,  injuries  and  deaths  due  to  tres- 
passing in  Wisconsin  for  the  fiscal  years  1912  and  1913 
shows  eighty-seven  persons  killed  and  one  hundred  and 
ninety-six  injured  on  crossings  compared  with  two  hun- 
dred and  forty-eight  "trespassers"  killed  and  one  hundred 
and  twenty-three  injured.  No  effective  legislation  has  been 
enacted  in  Wisconsin  to  lessen  the  number  of  deaths  and 
accidents  to  ' '  trespassers. ' '  Measures  to  fix  a  nominal  fine 
for  trespass  on  tracks  have  been  repeatedly  defeated. 

That  accidents  are  fewer  at  protected  crossings  and 
that  the  Commission  is  justified  in  ordering  all  dangerous 
crossings  protected  is  indicated  by  the  records  of  deaths 
and  accidents  on  all  railroads  of  Wisconsin  for  the  fiscal 
years  1912  and  1913.  For  the  two  years  seventy-four  were 
killed  and  one  hundred  and  sixty-nine  were  injured  at 
' '  unprotected ' '  crossings,  compared  with  thirteen  killed  and 
twenty-seven  injured  at  "protected"  crossings. 

Nearly  1,000  people  are  annually  killed  in  the  United 
States  on  highway  grade  crossings  1  and  in  two  years,  1912 
and  1913,  seventy-four  were  killed  and  one  hundred  and 
sixty-nine  were  injured  on  unprotected  crossings  in  Wis- 
consin. Through  proper  precautions  many  such  accidents 
could  be  avoided.    It  was  this  problem  that  the  legislature 


1  Dunn,   "American   Transportation   Question,"   171. 


268     RAILROADS  AND  PUBLIC  UTILITIES 


Record  of  Grade-Crossing  Accidents,  Injuries  and  Deaths  Due 
to  Trespassing  in  Wisconsin  for  Years  1912,  1913,  1914 


1912 

1913 

1914 

KiUed 

Injured 

Killed 

Injured 

Killed 

Injured 

Trespass .... 

111 

31 

137 

92 

141 

112 

Unprotected 

crossings . . 

41 

77 

33 

92 

9 

40 

Protected 

crossings : 

Bell.  ... 

3 

5 

3 

6 

2 

13 

Flag.... 

3 

4 

0 

4 

3 

6 

Gates. . . 

0 

0 

4 

8 

4 

5 

Total,   exclu- 

sive of  tres- 

passers   

47 

86 

40 

110 

18 

64 

sought  to  deal  with  in  1909,  when  it  enacted  the  highway 
crossing  law  placing  its  administration  with  the  Railroad 
Commission. 

Shortly  after  the  introduction  of  the  steam  railroad  into 
the  economic  life  of  the  state  the  legislature  enacted  a  law 
which  required  that  every  railroad  should  restore  streets, 
highways,  canals  or  streams  crossed  by  it  "to  such  condi- 
tion" that  their  usefulness  "shall  not  be  materially  im- 
paired." This  statute,  copied  from  New  York  and  enacted 
in  1872,  is  merely  declaratory  of  the  common  law  and  as 
construed  by  the  supreme  court  has  no  application  to  a 
highway  built  after  the  construction  of  a  railroad  which 
it  crosses.  It  related  principally  to  new  railroad  construc- 
tion and  the  maintenance  of  crossings  after  the  construc- 
tion had  been  completed.  This  law  was  found  to  be  in- 
sufficient to  meet  new  conditions  arising  after  a  railroad 
had  been  constructed  and  was  in  operation. 

To  meet  such  situations  the  legislature  in  1887  passed 


IMPROVEMENTS  IN  SAFETY  AND  SERVICE  269 

a  law  which  provided  that  the  grades  of  highways  and 
railroads  at  crossings  be  constructed  by  voluntary  agree- 
ment between  the  supervisors  of  a  town,  the  trustees  of  the 
village,  or  county  board.  The  cost  was  to  be  apportioned 
by  agreement  between  the  railroad  and  the  town,  village 
or  county,  as  the  case  may  be.  It  was  almost  impossible, 
except  in  extreme  cases,  to  get  action  under  this  law.  No 
agreement  could  be  reached  over  the  apportionments.  The 
legislation  of  1909  makes  effective  the  provisions  of  the 
latter  law  by  empowering  the  Railroad  Commission  to  com- 
pel the  separation  of  grade  crossings  and  apportion  the 
cost  of  the  work.  This  statute  includes  not  only  towns, 
villages  or  counties,  but  cities  as  well.1 

Although  dangerous  crossings  and  accidents  on  them 
were  the  source  of  constant  complaint,  the  Commission  had 
no  authority  prior  to  1909  to  deal  with  crossings  to  compel 
a  separation  of  grades.  To  meet  this  condition  a  confer- 
ence of  railroads,  representatives  of  municipalities  and 
others  interested  in  the  matter  was  called  and  a  bill  was 
drafted.  The  statute  as  enacted  and  amended  gives  the 
Railroad  Commission  complete  power  to  direct  the  charac- 
ter of  the  grade  separation,  the  straightening  of  highways 
near  crossing,  or  their  relocation,  and  an  apportionment  of 
the  expense  between  the  railroad  and  the  town,  village  or 
city.  This  law  has  since  been  adopted  in  other  states.  It 
has  been  upheld  by  the  supreme  court.2 

There  has  been  a  slight  opposition  to  this  legislation 
from  some  of  the  larger  cities  of  the  state,  which  believe 
that  the  Commission  should  have  the  power  to  order  the 
separation,  but  that  the  entire  expense  of  the  improvement 
should  be  placed  upon  the  railroad.  Such  a  change  would 
deprive  the  Commission  of  the  power  to  apportion  the  cost 

^ec.  1797-12d,  Eevised  Statutes  of  1913. 

2  Town  of  Polk  v.  Railroad  Commission  of  Wisconsin,  143  Wiscon- 
sin Reports,  191. 


270     RAILROADS  AND  PUBLIC  UTLLITIES 

of  making  separation  of  grades.  This  proposed  legislation 
has  been  defeated  by  the  legislature  on  the  ground  that 
the  cities  were  partly  responsible  for  the  need  of  separa- 
tion. 

The  direct  benefits  to  a  city  derived  from  the  elimina- 
tion of  grade  crossings  are : 

1.  Safety  of  vehicles  and  pedestrians  using  the  streets 
is  enhanced. 

2.  Great  delay  in  street  traffic,  which  in  large  cities 
would  be  a  tremendous  economic  waste,  is  eliminated. 

3.  It  removes  the  delays  of  fire  trucks  that  have  been 
the  cause  of  property  losses  because  of  inability  to  reach 
the  fire  in  time  to  check  it. 

4.  The  blockade  of  street  railway  traffic  at  grade  cross- 
ings is  eliminated.  It  permits  the  development  of  a  transit 
service  that  carries  population  out  further,  reducing  con- 
gestion of  population,  and  inconvenience  in  travel. 

"When  the  railroads  were  originally  constructed  there 
was  no  necessity  for  grade  separation,  but  as  the  city  ex- 
panded these  outlying  thoroughfares  became  more  and 
more  important  until  heavy  street  traffic  required  public 
protection.  Moreover,  the  most  expensive  grade  separations 
are  in  cities  and  to  place  the  burden  entirely  upon  the 
railroad  would  be  to  shift  the  burden  back  upon  the  people 
of  the  state.  As  a  result  those  who  benefit  directly  from 
the  improvement  may  pay  little  or  nothing  for  the  im- 
provement, while  those  who  live  outside  the  cities  and 
contribute  the  bulk  of  the  traffic  must  bear  an  unjust 
expense  of  improving  the  cities  of  the  state.  If  the  burden 
is  entirely  placed  upon  the  railroad  company,  the  railroad 
must  place  it  back  upon  the  shipper.  The  farmer  who 
ships  his  stock  or  grain  to  market,  the  lumberman  who 
ships  his  forest  products  or  manufactured  goods,  the  miner 
who  ships  the  product  of  his  mine,  must  contribute  to  the 
improvement,  while  those  who  enjoy  the  increased  value 


IMPROVEMENTS  IN  SAFETY  AND  SERVICE  271 

of  lands  resulting  from  it  may  go  entirely  free  of  the 
burden. 

Grade  separations  in  country  districts  are  compara- 
tively inexpensive  when  compared  with  the  expensive  via- 
ducts, steel  and  concrete  structures  that  are  required  in 
the  cities.  The  recent  separation  of  grades  of  the  northern 
division  of  the  Chicago,  Milwaukee  &  St.  Paul  road  into 
Milwaukee  will  cost  upwards  of  $6,000,000.  Taken  as  a 
whole  the  crossing  orders  of  the  Commission  place  from 
70  to  90  per  cent  of  the  expense  upon  the  railroad  and 
the  balance  is  borne  by  the  community. 

In  no  state  in  the  union  has  so  systematic  an  endeavor 
been  made  as  in  Wisconsin  to  protect  dangerous  cross- 
ings. Improvements  of  this  character  have  been  made 
on  all  of  the  roads  of  the  state  but  the  work  on  the  two 
principal  roads  will  be  taken  as  illustrative  of  the  nature 
of  the  improvements. 

Orders  made  by  the  Commission  for  crossing  protec- 
tion on  the  Chicago  &  Northwestern  road  up  to  January 
1,  1914,  provided  for  forty-one  automatic  electric  alarms, 
six  grade  separations,  three  improvements  to  existing 
separated  grades,  seven  crossings  improved  by  grading  or 
removal  of  obstructions  to  view,  one  crossing  relocated, 
three  crossing  gates,  improved  paving  over  four  city  cross- 
ings, five  crossings  involving  minor  repairs,  also  the  services 
of  twenty-two  additional  gatemen  or  flagmen,  of  which 
number,  six  were  required  for  temporary  protection  at 
Milwaukee  pending  grade  separation.  Two  new  crossings 
were  opened.  Track  and  roadway  improvements  cover  the 
complete  remodeling  of  one  interlocking  plant,  the  installa- 
tion of  one  railway  crossing  gate  and  one  new  track  culvert. 

On  the  Chicago.  Milwaukee  &  St.  Paul  system  in  this 
state  the  improvements  under  separate  orders  of  the  Com- 
mission provide  for  fifty  automatic  electric  alarms,  four 
electric  gongs,  three   crossing  gates,  three  grade  separa- 


272     RAILROADS  AND  PUBLIC  UTILITIES 

tions,  two  crossing  relocations,  nine  crossings  improved  by 
grading  or  removal  of  obstructions,  two  bridges  repaired, 
and  other  minor  improvements. 

A  summary  of  the  totals  for  all  the  roads  shows  that 
$196,564  was  actually  spent  in  crossing  work  to  January  1, 
1914,  all  but  $130  of  which  was  spent  directly  for  protec- 
tion. The  annual  wage  expenditure  for  flagmen  and  gate- 
men  was  $24,125.  Yet  these  figures  do  not  include  the  large 
expenditures  now  being  made  in  Milwaukee  for  track  eleva- 
tion. 

Under  a  law  enacted  in  1913  the  Commission  has  ordered 
the  change  of  the  route  of  public  highways  in  several 
instances  to  secure  a  less  dangerous  approach.1  Wherever 
wrecks  or  accidents  occur  the  Commission  makes  an  investi- 
gation to  determine  the  cause  and  to  institute  such  protec- 
tion as  will  eliminate  future  dangers.  The  roadbeds  of  the 
systems,  interlocking  switches,  block  signals  and  fences  along 
the  route  are  under  regular  inspection,  and  improvements 
are  daily  suggested.  At  times  in  cold  winter  weather 
the  Commission  directs  the  speed  at  which  trains  may 
be  operated  over  the  lines.  All  trains  must  carry  medical 
supplies,  such  as  tape,  cotton  and  bandages  for  use  in  case 
of  accidents.2  By  eliminating  the  causes  of  accidents  and 
wrecks,  caused  by  dangerous  crossings,  grades  and  road- 
beds, it  is  hoped  to  reduce  the  toll  of  property  destroyed 
and  men  killed  and  injured  to  the  low  percentage  now 
reached  in  some  of  the  European  countries. 

Every  encouragement  is  given  by  the  Commission  and 
its  engineering  staff  to  the  formation  of  safety  organiza- 
tions among  railroad  employees.  The  "committees  of 
safety"  organized  on  the  Chicago  &  Northwestern  line  by 

1  Town  of  Almena  v.  C,  St.  P.  M.  $  Omaha  Fit/.  Co.,  1914,  14  W. 
R.  C.  R.,  No.  R-835 ;  In  re  Investigation  C,  B.  4"  Q-  ■#•  Co.  Crossing 
near  Crossville,  13  W.  R.  C.  R.,  1913,  No.  R-757. 

2  Ch.  469,  Laws  of  1913. 


IMPROVEMENTS  IN  SAFETY  AND  SERVICE  273 

Ralph  C.  Richards,  which  in  twenty-eight  months  x  reduced 
the  death  toll  on  the  entire  system  179  or  22  per  cent  and 
the  injury  roll  6,447  or  27  per  cent  by  means  of  confer- 
ences among  employees,  is  urged  and  aided  by  the  Com- 
mission on  all  of  the  other  lines  operating  in  the  state. 

1  American  Magazine,  Dec,  1913,  LXXVI,  45. 


CHAPTER  XIX 

SOME    ACCOMPLISHMENTS    IN   HANDLING  EAILEOAD 

EATES 

According  to  a  recent  change  in  the  law  no  rate  can 
become  effective  without  the  approval  of  the  Commission. 
A  striking  example  of  the  benefit  derived  from  this  pro- 
vision, when  applied  to  the  thousands  of  rates  the  Com- 
mission must  pass  upon  annually,  is  seen  in  what  is  known 
as  the  Milwaukee  switching  case.  The  Chicago,  Milwaukee 
&  St.  Paul  Eailway  filed  with  the  Commission  a  tariff 
proposing  a  change  from  a  flat  rate  of  $5  per  car  for  trans- 
portation within  the  switching  limits  of  the  district  to  a 
minimum  of  $9  per  car.  The  Commission  did  not  give 
approval  to  the  change  as  proposed,  nor  allow  any  change 
until  after  it  had  made  a  thorough  study  of  the  situation, 
requiring  more  than  a  year.  It  would  be  difficult  to  esti- 
mate exactly  the  amount  saved  the  Milwaukee  patrons  of 
the  company,  but  it  was  considerable.  It  is  worthy  of 
notice  that  since  the  approval  of  the  Commission  became 
essential  before  a  change  of  rate  could  be  made,  the  tariff 
department  has  passed  on  changes  involving  upwards  of 
100,000  rates.  The  rates  upon  which  increases  have  been 
sought  relate  to  a  variety  of  commodities,  including  saw- 
dust, lumber,  drain  tile,  overalls  and  duck  coats,  asphalt 
and  asphaltum,  advances  in  the  rates  on  malt,  cucumbers, 
beans,  fish  boxes,  pulpwood,  charcoal,  buckwheat,  rye  and 
flour  and  scores  of  other  commodities  of  which  these  are 
but  typical  examples.     It  is  evident  that  rates  would  have 

274 


HANDLING  RAILROAD  RATES  275 

been  increased  on  many  classes  of  shipments  had  it  not 
been  for  the  hand  of  a  regulatory  body.  It  is  a  conservative 
estimate,  however,  that  should  regulation  be  done  away 
with,  the  corporations  now  under  supervision  would  take 
from  the  people  in  the  first  year  after  the  abolishment  of 
regulation,  a  sum  in  excess  of  .$5,000,000  in  increased  rates. 

Almost  as  soon  as  the  Commission  was  created  it  began, 
either  upon  complaint  or  upon  its  own  motion,  an  investi- 
gation of  freight  rates  affecting  the  more  important  com- 
modities and  necessities  of  life.  Reduction  in  grain  rates 
made  the  first  year  after  the  creation  of  the  Commission, 
compared  with  those  in  effect  before  regulation,  when  ap- 
plied to  crop  shipments  from  different  localities  in  the 
state,  amounted  to  an  annual  saving  of  approximately 
$600,000.  Other  important  commodities  affected  by  reduc- 
tions are  coal,  cord  wood,  pulp,  milk,  cream,  cheese,  ice, 
slab  wood,  lumber,  crushed  stone,  sand,  gravel,  brick,  tile, 
livestock  and  other  commodities  too  numerous  to  mention. 
These  reductions  vary  from  1  to  20  per  cent ;  some  include 
the  entire  state,  others  only  shipments  on  one  line  of  rail- 
road. It  has  been  estimated  that  the  aggregate  savings  to 
the  patrons  of  the  carriers  arising  out  of  orders  of  the 
Commission  and  the  enactment  of  the  two-cent  fare  law 
amount  to  $2,-100,000  per  annum  in  railroad  charges 
alone. 

In  several  instances  the  Commission  has  taken  cases 
upon  appeal  to  the  Interstate  Commerce  Commission.  Act- 
ing as  petitioner  in  one  case  it  secured  a  20-per-cent  re- 
duction in  cheese  rates.  It  was  active  as  petitioner  in 
both  the  express  and  western  classification  rate  cases.  In 
the  former  case  the  Commission's  computations  involved 
the  consideration  of  at  least  one  million  "basing  rates"; 
the  final  decision  required  130,000  separate  rate  computa- 
tions to  place  the  federal  and  state  decisions  in  accord. 
This  decision  saves  the  Wisconsin  public  approximately 


276     RAILROADS  AND  PUBLIC  UTILITIES 

$100,000  annually  over  the  rates  in  effect  before.  The  re- 
ductions varied  from  1  to  30  per  cent. 

Because  over  7,000  different  rates  are  listed  in  the 
western  classification  schedule  and  nearly  1,000  changes  or 
additions  to  the  classification  are  made  annually  for  inter- 
state shipments,  the  handling  of  these  schedules  is  compli- 
cated. Much  of  the  correspondence  of  the  Commission  is 
over  rate  matters. 

Under  a  law  enacted  in  1913  the  Commission  is  given 
power  to  investigate  freight  and  express  bills.  It  provides 
for  the  small  and  irregular  shipper  the  same  benefit  that 
accrues  to  the  large  shipper  allied  with  a  traffic  bureau, 
and  does  it  without  cost  to  the  shipper.  This  feature  of  the 
Commission's  duty  is  daily  becoming  more  useful  to  more 
and  more  patrons  of  the  steam  railroads  and  the  express 
companies.  Under  the  railroad  law  the  Commission  is  also 
given  power  to  order  refunds  for  overcharges  made  to 
shippers.  This  results  in  many  thousands  of  dollars  being 
returned  and  a  more  careful  attention  to  tariffs  by  the  local 
shipping  clerks. 

It  should  not  be  inferred,  however,  that  the  accom- 
plishments of  the  Commission  should  be  measured  by  reduc- 
tions in  rates  alone.  It  is  as  much  the  province  of  the 
Commission,  and  should  be  included  among  its  accomplish- 
ments, if  in  the  interests  of  justice  and  equity,  rates  are 
increased  when  found  to  be  unreasonably  low.  While  the 
reductions  in  rates  have  thus  far  exceeded  the  advances 
allowed,  increases  have  been  granted  in  many  instances. 
The  spirit  of  fairness  which  has  characterized  the  action 
and  orders  of  the  Commission  in  railroad  matters,  and 
which  has  earned  for  it  the  confidence  and  good  will  of 
railroads  and  shippers  alike,  is  perhaps  its  greatest  accom- 
plishment and  the  one  it  was  especially  created  to  estab- 
lish. 


CHAPTER  XX 

STATE    CONTROL    OF    MUNICIPALLY    OWNED    PLANTS 

Municipal  ownership  attains  its  highest  efficiency  under 
state  regulation.  The  stimulus  engendered  by  comparison 
with  privately  owned  enterprises  develops  its  greatest  use- 
fulness. This  class  of  utilities  in  Wisconsin  is  subjected 
to  the  same  rules  and  regulations  as  private  plants.  There 
is  a  common  misconception,  however,  that  municipal  utili- 
ties should  not  be  supervised  by  the  state.  No  doctrine 
could  be  more  fallacious.  The  idea  of  non-regulation  of 
municipal  plants  seems  to  be  anchored  in  the  belief  that 
the  principal  duty  of  a  regulating  body  is  to  limit  the 
profits  to  a  reasonable  return  upon  the  investment,  and 
this  element  having  been  eliminated  by  municipal  ownership 
the  need  of  further  control  is  unnecessary.  Such  an  idea 
is  based  on  a  false  premise. 

Customers  of  municipal  plants  need  protection  as  to 
rates  and  service,  as  well  as  those  served  by  private  utilities. 
A  plant  may  have  little  or  no  net  returns,  and  yet  the 
rates  as  a  whole  for  different  classes  of  consumers  may  be 
unreasonable  or  discriminatory.  One  class  of  customers 
may  be  charged  rates  so  high  that  they  will  be  contributing 
a  part  of  the  cost  of  the  service  rendered  to  some  other 
class.  Again  the  plant  may  be  extravagantly  or  inefficiently 
operated,  as  a  scientific  cost  analysis  and  comparison  with 
other   plants  under  state   regulation   will    disclose.1      The 


1  See  Ch.  VI  for  a  table  showing  the  comparative  costs  for  each 
step  in  the  operation   of  municipal  water   plants  in  the  state. 

277 


278     RAILROADS  AND  PUBLIC  UTILITIES 

result  under  such  circumstances  may  well  be  that  nearly 
all  classes  are  paying  excessive  rates  and  the  plant  losing 
money.  Rate  of  profits  is  but  one  factor  to  be  dealt  with 
in  the  field  of  regulation.  The  building  of  equitable  sched- 
ules of  rates,  so  that  each  consumer  will,  as  nearly  as  prac- 
ticable, be  required  to  meet  his  proper  share  of  the  expenses 
of  the  utility  and  the  attainment  of  adequate  service,  is 
equally  important.  Regulation  to  be  effective  must  dis- 
cover and  eliminate  these  inequalities.  It  is  a  task  that 
municipal  plants  are  seldom  able  to  accomplish  efficiently 
without  the  aid  of  state  experts. 

No  telephone  utilities  in  Wisconsin  are  municipally 
owned.  The  gas  and  electric  plants  in  the  larger  cities 
are  also  under  private  ownership.  Wisconsin  has,  however, 
179  municipal  plants  with  properties  valued  at  $16,460,594 
compared  with  162  private  utilities  in  the  same  classes,  with 
valuations  aggregating  $15,616,232.  The  accompanying 
table  x  gives  a  financial  comparison  of  the  municipal  and 
private  plants  in  the  state.  It  is  the  smaller  utilities 
unable  to  hire  experts  who  request  the  most  aid  from  the 
state.  Does  it  seem  a  reasonable  public  policy  that  the  state 
should  deny  this  'needed  service  to  so  large  a  class  of 
municipal  utilities? 

Evils  exist  under  both  systems  of  ownership.  The 
records  of  complaints  before  the  Commission  form  a  safe 
criterion.  Out  of  forty-four  formal  cases  relating  to  muni- 
cipal plants,  fifteen  involved  the  reasonableness  of  existing 

xFor  this  table  the  classification  of  plants  was  made  on  the  basis 
of  population  in  which  the  utility  was  located:  Class  "A"  in  cities 
over  10,000  inhabitants;  Class  "B"  in  cities  between  3,000  and 
10,000;  Class  "C"  between  1,500  and  3,000,  and  Class  "D"  between 
500  and  1,500.  Utilities  in  cities  below  500  are  in  "condensed"  class. 
On  July  30,  1913,  the  basis  of  classification  was  changed  to 
a  combined  revenue  and  population,  in  the  belief  that  revenues 
make  a  safer  criterion  of  the  extent  of  accounts  that  a  utility  should 
keep. 


STATE  CONTROL  OF  MUNICIPAL  PLANTS    279 


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280     RAILROADS  AND  PUBLIC  UTILITIES 

rates.  Of  sixty  informal  cases  handled  during  the  three 
fiscal  years  ending  June  30,  1912,  nearly  all  involved  ques- 
tions of  service,  inefficient  operation  or  rate  discriminations. 
In  the  determination  of  equitable  rates  the  question  of  cost 
analysis  is  of  primary  consideration.  Its  importance  has 
been  considered  in  the  discussion  of  accounting  and  in  the 
following  chapter  on  the  defects  of  local  regulation.  Aside 
from  complete  records  of  a  plant's  operating  costs,  it  is 
necessary  to  have  similar  statistics  gathered  on  the  same 
basis  from  other  plants,  for  comparative  purposes.  These 
data  can  be  secured  only  through  a  system  of  state  super- 
vision. It  is  through  such  methods  that  abnormal  operating 
expenses  are  eliminated  and  strict  business  methods  en- 
forced. Every  reason  exists  why  these  same  records  should 
be  obtained  from  municipal  plants.  It  makes  the  manage- 
ments more  efficient  and  insures  a  better  character  of 
service  to  the  public. 

A  municipal  plant  renders  two  distinct  classes  of  serv- 
ice: (1)  public,  and  (2)  private.  If  the  city  pays  nothing 
for  its  service,  or  if  it  does  not  pay  its  proportionate  share, 
as  was  discovered  by  the  Commission  in  some  cases  when 
the  utilities  law  was  passed,  this  is  a  discrimination  in 
favor  of  the  taxpayer.  If  the  private  service  rates  are 
too  low,  the  taxpayers  are  discriminated  against  in  being 
compelled  to  make  up  the  balance.  It  is  but  fair  that  each 
class  should  shoulder  its  own  burden,  and  that  each  in- 
dividual consumer  should  pay  as  nearly  as  it  is  practicable 
to  determine  his  share  of  the  cost  of  operating  the  plant. 
The  discriminations  in  rates  that  existed  when  state  regula- 
tion was  inaugurated  were  prevalent  in  municipal  as  well 
as  private  plants.1  The  complaints  that  have  since  been 
received  from  taxpayers,  consumers  and  city  authorities 
indicate  that  the  public  has  come  to  realize  clearly  that 

1  For  further  data  on  discriminations  when  the  Wisconsin  utilities 
law  became  effective,  see  Ch.  XXI. 


STATE  CONTROL  OF  MUNICIPAL  PLANTS   281 

rates  for  municipal  plants  should  closely  adhere  to  the  cost 
of  the  service. 

Rates  to  be  charged  by  municipal  plants  are  computed 
on  the  same  principles  and  methods  as  are  used  in  deter- 
mining the  reasonableness  of  rates  in  private  plants.  Ac- 
curate operating  records,  comparative  cost  figures,  and  an 
unprejudiced  view  of  local  conditions  are  essential.1  The 
reasons  why  the  municipality  cannot  secure  these  records 
independently  of  a  state  commission  are  so  fully  discussed 
in  the  following  chapter  that  no  discussion  of  them  will  be 
attempted  here.  Every  argument  that  obtains  for  state 
regulation,  instead  of  local  regulation,  has  the  same  force 
in  considering  the  question  of  the  state  regulation  of  muni- 
cipal enterprises. 

One  of  the  most  tedious  tasks  that  has  been  imposed 
upon  the  Commission  has  been  to  impress  upon  the  man- 
agements of  municipal  utilities  the  desirability  of  accurate 
financial  records  of  plant  operation,  kept  on  a  uniform 
basis.  Before  inequalities  can  be  eliminated  this  is 
indispensable.  That  these  inequalities  do  exist 2  is  well 
illustrated  in  the  case  of  the  Cumberland  Municipal  Electric 
Light  Plant,  in  which  the  Commission  said : 

The  applicant  in  this  ease  desired  to  increase  certain  3  of  its 
present  rates  for  electric  current,  on  the  ground  that  these  rates 
are  inadequate  and  did  not  cover  the  cost  of  furnishing  the  service 


1 W.  C.  Keyer  of  the  Commission 's  staff  has  prepared  a  brief 
(unpublished)  on  the  need  of  state  regulation  of  municipal  plants 
which  has  been  freely  consulted  in  the  preparation  of  this  chapter. 

2  Among  cases  illustrating  typical  rate  inequalities  in  municipal 
plants  are  In  re  Application  Greenwood  Municipal  Electric  Light 
Plant,  1910,  6  W.  R.  C.  R.,  60;  In  re  Application  City  of  Madison 
for  Authority  to  Equalize  Its  Water  Bates,  1909,  3  W.  R.  C.  R.,  299; 
and  In  re  Application  Bruce  Water  <r  Light  Commission,  1912,  9  W. 
R.  C.  R.,  474. 

3  In  re  Application  Cumberland  Mun.  El.  Lt.  Plant,  1909,  4  W. 
R.  C.  R.,  214. 


282     RAILROADS  AND  PUBLIC  UTILITIES 

involved.  Upon  bearing  and  investigation  it  was  found  that 
the  applicant's  rate  schedule  was  not  properly  adjusted  and 
that  certain  classes  of  consumers  paid  less  than  their  just  share 
of  the  cost  of  operating  the  plant.  Because  of  these  facts  the 
Commission  endeavored  to  compute  more  equitable  schedules  of 
rates,  and  has  authorized  the  applicant  to  put  these  rates  into 
effect. 

Even  where  the  managers  of  the  municipal  utility  have 
formulated  their  own  rates  and  sent  them  to  the  Commis- 
sion for  approval,  the  schedules  on  examination  have  been 
found  to  be  regressive  or  discriminatory.  The  following 
water  rates  submitted  by  the  village  of  Randolph,  January 
20,  1913,  are  typical : 


1,000  gallons  or  less  per  month,  $.60  per  thousand  gallons 

1,000  to  2,000  gallons  per  month 50  per  thousand  gallons 

2,000  to  3,000  gallons  per  month 40  per  thousand  gallons 

3,000  to  4,000  gallons  per  month 30  per  thousand  gallons 

Minimum  charge,  $7 .  20  per  year 


The  effect  of  this  schedule  is  illustrated  by  the  accom- 
panying diagram.  A  glance  will  show  that  consumers 
using  different  amounts  of  water  are  charged  the  same 
sum.  Consumers  "A,"  "B"  and  "C"  using  2,000,  2,500 
and  3,325  gallons  of  water  respectively  pay  $1  per  month. 
When  "A"  consumes  2,000  his  rate  is  50  cents  per  1,000 
gallons  or  $1.  If  he  uses  2,100  gallons  his  rate  is  in  the 
group  that  pays  40  cents  per  1,000  gallons  and  his  charge 
would  then  be  84  cents.  By  consuming  100  gallons  more 
he  is  able  to  reduce  his  bill  16  cents.  Such  rates  lead  to 
wastefulness.1 

1  Other  municipal  water  plants  that  have  submitted  rates  to  the 
Commission  for  approval  are  Merrillan,  Middleton,  East  Troy,  Au- 
gusta, Johnson  Creek,  Oregon,  Hartford  and  Mineral  Point.  Electric 
rates  for  municipal  plants  have  been  considered  in  cases  from  Mer- 
rillan and  Clintonville. 


283 


284      RAILROADS  AND  PUBLIC  UTILITIES 

There  are  many  instances  where  localities  operating 
municipal  plants  realize  that  inequalities  exist  and  apply 
to  the  Commission  to  make  adjustments.1  These  voluntary 
applications  typify  the  aid  which  a  state  commission  can 
render  a  municipal  plant  in  the  matter  of  rate-making  alone. 

A  further  indication  of  real  assistance  that  a  state 
commission  can  render  to  a  municipal  plant  is  in  the 
settlement  of  bitter  local  strifes.  For  several  years  the 
city  of  Sparta  has  been  quarreling  over  its  water  plant. 
The  Commission  has  made  an  audit  of  the  plant,  installed  a 
system  of  accounts,  adjusted  the  rates,  and  the  municipal 
row  has  entirely  subsided. 

It  is  only  through  the  aid  of  a  state  commission  that 
such  service  could  be  secured  by  a  municipal  plant.  The 
state  has  no  interest  in  these  disputes,  except  to  deal  justly 
upon  the  facts,  and  in  the  large  majority  of  the  cases  all 
parties  at  interest  are  willing  to  submit  the  matter  for 
settlement.  Hence,  as  has  been  indicated,  the  service  which 
the  state  renders  to  a  municipal  plant  divides  itself  into 
three  classes:  (1)  assistance  in  establishing  proper  uni- 
form accounts;  (2)  regulation  of  service;  (3)  engineer- 
ing assistance.  Of  what  direct  aid  has  the  state  been  to 
municipal  utilities  in  dealing  with  these  three  problems? 

Previous  to  January  1,  1912,  the  methods  of  account- 
ing were  left  largely  to  the  utilities  themselves.  The  records 
of  many  plants  were  so  incomplete  that  control  by  the 
state  was  imperative.  Out  of  177  municipal  plants,  166 
maintained  operating  accounts  so  faulty  that  the  Commis- 
sion could  not  obtain  the  true  operating  expenses.  Out  of 
38  cases  where  the  Commission  was  called  to  render  special 
accounting  assistance,  26  were  municipal  plants.    In  muni- 


1  Applications  to  make  adjustments  have  been  received  among 
other  cities  from  Fond  du  Lac,  Baraboo,  Evansville,  Eichland  Center, 
Marshfield,  Edgerton,  Clintonville,  Watertown,  New  Holstein,  Colum- 
bus, Sheboygan,  and  Jefferson. 


STATE  CONTROL  OF  MUNICIPAL  PLANTS   285 

cipal  plants  in  the  following  thirteen  cities  complete  sys- 
tems were  installed:  Bloomer,  Clintonville,  Elkhart,  Elk- 
horn,  Grand  Rapids,  Kankauna,  Kilbonrn,  Lake  Mills,  Med- 
ford,  Montfort,  New  London,  Plymouth  and  Sharon.  This 
service  is  furnished  by  the  state  to  the  municipality  with- 
out expense  to  the  latter,  except  for  the  cost  of  printing 
the  blanks. 

Turning  now  to  the  question  of  service  furnished  by 
municipal  plants,  the  improvement  has  been  marked. 
Through  the  constant  visits  of  inspectors,  managers  of 
municipal  utilities  have  been  taught  the  importance  of  uni- 
form electric  voltage,  the  method  of  testing  the  accuracy 
of  meters  and  other  information  regarding  plant  opera- 
tion. Here  is  a  report  of  one  inspector  covering  a  period 
of  four  months: 

This  inspector  made  twelve  inspections  at  municipal  plants 
and  forty  inspections  of  plants  not  municipally  owned,  during 
this  time. 

The  assistance  given  in  connection  with  the  inspection  of  mu- 
nicipal plants  included  information  on  meter  testing  for  six 
of  the  municipal  plants;  one  plant  was  shown  how  to  test  220 
V.  meters  using  their  110  V.  rotating  standard;  one  plant  was 
instructed  in  proper  methods  for  testing  three  phase  meter.  Offi- 
cials of  another  plant  were  interviewed  regarding  the  progress 
it  was  making  with  meter  testing,  and  one  of  the  newer  plants, 
was  assisted  in  making  a  number  of  meter  tests.  Meter  test  rec- 
ord forms  were  drawn  up  for  three  plants  and  one  plant  was 
given  advice  regarding  the  metering  of  street  lighting  current. 
Two  plants  were  given  information  on  their  own  request  regard- 
ing methods  of  operating  the  plant ;  three  had  the  inspector  draw 
up  suitable  forms  for  station  records;  one  was  given  advice  re- 
garding the  general  matter  of  voltage  regulation;  one  was  given 
assistance  in  the  use  of  graphic  recording  instruments;  one  plant 
was  advised  as  to  how  best  to  overcome  difficulties  due  to  unbal- 
ancing of  the  system,  and  another  was  assisted  in  eliminating 
the  trouble  caused  by  moving-picture  machine.     One  plant  asked 


286     RAILROADS  AND  PUBLIC  UTILITIES 

advice  regarding  the  running  of  its  high  tension  lines  across  rail- 
road tracks.  The  administration  of  two  cities  asked  general  ad- 
vice regarding  improvements  they  proposed  making  in  their 
plants.  One  group  of  city  officials  was  given  information  re- 
garding changing  from  a  single-phase  to  a  three-phase  system; 
one  plant  was  advised  regarding  lamp  renewals;  a  new  plant  had 
all  rules  of  service  thoroughly  explained  to  its  lighting  commis- 
sion at  its  special  request.  General  advice  was  given  with  re- 
gard to  rates  at  the  request  of  one  administration,  and  the  im- 
portance of  accounting  was  pointed  out  to  one  administration 
at  its  request.  One  city  obtained  information  regarding  inter- 
ferences between  high  voltage  power  lines  and  transmission  lines; 
the  switchboard  instruments  were  found  out  of  adjustment  and 
adjusted  in  one  municipal  plant;  in  another,  assistance  was 
given  in  a  complaint  meter  test,  which  led  to  the  discovery  of  a 
wrong  meter  constant  which  has  been  causing  a  complaint  which 
the  local  inspector  had  been  unable  to  satisfactorily  settle.  In  an- 
other city  a  meter  test  was  witnessed  by  the  inspector  at  the  re- 
quest of  the  operator.  All  of  the  above  assistance  was  rendered 
to  officials  or  employees  of  municipal  plants  and  in  a  large  pro- 
portion of  the  cases  information  was  given  to  several  officials,  and 
in  some  cases  given  before  a  meeting  of  the  lighting  commission 
and  the  village  board. 

A  more  complete  summary  of  inspectors'  records  will 
reveal  some  of  the  more  important  accomplishments.  Serv- 
ice inspections  covered  fifty-three  municipal  plants  in  1909 
and  fifty  in  1912.  For  comparative  purposes  the  meter 
testing  and  voltage  records  of  these  municipal  plants  in 
1909  and  1912  have  been  compared  with  the  same  records 
for  fifty-two  private  plants  in  1909  and  fifty-five  in  1912. 
See  page  287  for  the  results. 

The  fact  that  municipal  plants  do  not  improve  service 
as  readily  as  private  plants  is  perhaps  due  to  the  fact  that 
managers  of  municipal  plants  are  changed  oftener;  many 
of  the  electric  plants  are  small  and  the  employees  render 
other  service  to  the  city ;  the  superintendents  are  not  always 


STATE  CONTROL  OF  MUNICIPAL  PLANTS  287 


Average  per  cent  of  meters  tested  properly 

by  the  utility 

Number  of  plants  testing  over  90  per  cent 

of  meters  properly  by  the  utility 

Number  of  plants  testing  less  than  10  per 

cent  of  meters  properly  by  the  utility .  . 
Number    of    plants    testing    all    meters 

properly 


Municipal 


1909 

20 

6 

38 

2 


1912 
60 
19 
11 
15 


Private 


1909 

15 

3 

39 

3 


1912 

79 

38 

5 

26 


skilled  managers.  In  some  small  cities  the  superintendent 
acts  as  village  marshal,  meter  inspector  and  general  engi- 
neer. Here  is  where  the  state  renders  a  public  service 
when  by  inspection,  supervision,  and  the  furnishing  of 
advice  to  the  managers  of  municipal  utilities  it  develops 
and  sustains  the  plant  at  a  point  of  reasonable  efficiency. 
In  this  respect  the  state  Commission  stands  in  relation  to 
the  local  municipal  utilities  as  a  central  clearing  house  of 
information  regarding  public  utility  methods  and  ex- 
perience everywhere. 

Scores  of  municipal  plants  have  received  engineering 
assistance  from  the  Commission ; x  valuations  have  been 
made  and  deficiencies  in  the  facilities  have  been  corrected. 
There  are  some  municipal  water  plants  in  which  deficien- 
cies have  been  discovered  by  the  engineering  staff  which 
unless  corrected  would  probably  have  resulted  in  serious 
consequences.  One  example  of  engineering  aid  to  muni- 
cipal plants  taken  from  the  records  of  the  Commission  will 
illustrate : 

1  Among  the  cities  and  municipal  plants  which  have  received 
services  from  the  engineering  staff  of  the  Railroad  Commission  are: 
Baldwin,  Barron,  Bloomer,  Cashton,  Columbus,  Darlington,  Eau 
Claire,  Elkhart  Lake,  Elroy,  Ft.  Atkinson,  Hudson,  Jefferson,  Keno- 
sha, La  Crosse,  Madison,  Marshfield,  Milwaukee,  Neenah,  New  Lis- 
bon, New  Richmond,  Portage,  Sheboygan,  Sparta,  Tomahawk,  Wa- 
tertown  and  Westhy. 


288     RAILROADS  AND  PUBLIC  UTILITIES 

The  city  authorities  of  Portage  requested  advice  from  the 
Commission's  engineers  as  to  the  advisability  of  contracting  with 
the  Kilbourn  Power  Company  for  electric  current  and  using  elec- 
tric instead  of  steam  power  for  operating  the  city  waterworks. 
City  also  requested  an  examination  and  report  upon  the  condi- 
tion of  its  plant  and  equipment  with  recommendations  as  to  any 
repairs  and  improvements  needed.     Both  requests  were  granted. 

Speaking  of  some  of  the  possible  benefits  of  state  regu- 
lation of  municipal  plants,  Delos  F.  Wilcox  has  said : 

In  so  far  as  regulation  is  effective  it  will  result  in  1  the  train- 
ing of  a  large  body  of  technical  men  to  look  at  public  utility 
problems  from  the  public  point  of  view.  This  development  will 
make  the  municipalization  of  public  utilities  more  practical  and 
the  success  of  municipal  operation  more  likely.  From  this  point 
of  view,  regulation  is  merely  training  men  for  the  more  direct  and 
far-reaching  responsibilities  of  public  ownership  and  operation. 
...  It  is  further  to  be  expected  that  the  public  knowledge 
which  comes  from  uniform  accurate  and  detailed  publicity  will 
make  municipal  ownership  more  feasible  and  private  ownership 
less  alluring  than  heretofore. 

In  private  plants  the  entire  resources,  skill  and  ability 
of  the  management  are  directed  to  the  one  end  of  service 
and  plant  development.  Often  these  conditions  are  lacking 
in  municipal  enterprises,  a  circumstance  that  makes  state 
regulation  all  the  more  important  to  the  consumers,  tax- 
payers and  the  public. 

1  Delos  F.  Wilcox,  "Effect  of  State  Regulation  on  Municipal 
Ownership  Movement,"  The  Annals  of  the  American  Academy  of 
Political  and  Social  Science,  May,  1914,  83-84. 


CHAPTER  XXI 

STATE  VERSUS  LOCAL  CONTROL 

No  one  will  longer  contend  that  regulation  of  public 
utilities  is  unnecessary.  There  are  differences  of  opinion, 
however,  as  to  the  method  of  control  to  be  applied  in  the 
solution  of  utility  problems.  Two  schools  of  regulation 
have  appeared.  First,  are  those  who  believe  in  the  control 
of  utilities  by  the  local  unit.  This  system  is  sometimes 
called  "home  rule"  regulation.  Second,  are  those  who 
advocate  regulation  by  a  state  utilities  commission,  as  in 
New  York,  Wisconsin  and  many  other  states.  This  system 
is  based  on  the  clearly  defined  legal  doctrine  that  the  state 
is  paramount  and  that  "a  municipal  corporation  is,  as 
far  as  its  purely  municipal  relations  are  concerned,  simply 
an  agency  of  the  state  for  conducting  the  affairs  of  govern- 
ment."1 The  state's  right  to  regulate  public  utilities  has 
been  the  subject  of  much  misapprehension. 

Advocates  of  local  control  present  three  possible  meth- 
ods of  regulation :  ( 1 )  through  the  terms  of  the  franchise 
issued  by  the  locality  to  the  utility;  (2)  by  creating  a  local 
utilities  commission  to  regulate  service  and  rates;  (3)  by 
enacting  municipal  ordinances  as  the  necessities  arise. 

The  plan  of  franchise  control  has  been  so  universally 
attempted  that  there  are  sufficient  results  to  judge  of  its 
merits.  At  the  outset  the  distinction  should  be  made,  how- 
ever, that  "when  the  franchise  is  lawfully  granted,  it  is  a 

1  Williams  v.  Eggleson,  170  U.  S.,  304;  also  AtMns  v.  Kansas,  191 
U.  S.,  207. 

289 


290     RAILROADS  AND  PUBLIC  UTILITIES 

franchise  grant  from  the  state  and  not  from  the  municipal- 
ity, as  the  latter  acts  only  as  the  agent1  of  the  state." 
Acting  upon  this  legal  principle  the  legislature  of  Wiscon- 
sin enacted  a  law  by  which  the  indeterminate  permit  super- 
seded the  franchise.  This  was  fundamental  to  state  regu- 
lation. But  it  is  not  probable  that  there  was  a  single  fran- 
chise in  effect  at  the  time  of  the  substitution,  which  con- 
tained adequate  rate  and  service  provisions.  When  a 
franchise  is  originally  granted,  the  common  council  or 
authoritative  body  attempts  to  drive  a  shrewd  business  bar- 
gain with  the  managers  or  owners  of  the  prospective  utility. 
So  it  has  usually  put  into  the  contract  such  details  as  the 
number  of  fire  streams  or  the  rated  candle  power  of  arc 
lights,  both  of  which  tests  have  since  been  superseded 
through  the  development  of  the  art. 

Ordinarily  a  franchise  is  for  a  period  of  twenty  to  fifty 
years.  Within  that  single  interim  the  history  of  franchises 
shows  that  standards  of  service  and  rates  have  undergone  a 
revolution.  Even  the  Railroad  Commission,  after  five  years 
of  use,  found  it  necessary  to  change  its  service  require- 
ments to  keep  pace  with  developments.  Under  such  cir- 
cumstances, is  it  not  probable  that  service  and  rate  require- 
ments written  into  a  franchise  in  1894  would  be  antiquated 
in  1914?  But  even  if  these  standards  were  still  satisfactory 
there  is  usually  no  city  agency  to  determine  that  the 
requirements  are  being  fulfilled. 

Franchise  provisions  fixing  definite  rates  to  be  charged 
are  even  more  unsatisfactory.  Often  in  the  bargaining 
between  the  common  council  and  the  utility  manager  over 
rates  to  be  permitted  by  the  terms  of  franchise,  concessions 
are  made  to  the  city  that  must  of  necessity  be  offset  by 
extra  charges  on  the  private  consumers.  Again  the  facts 
upon  which  rate  provisions  of  a  franchise  should  be  predi- 

1  Milwaukee  v.  Mil.  Elec.  Ey.  Co.,  144  N.  W.  Eep.,  206. 


STATE  VERSUS  LOCAL  CONTROL    291 

cated  are  difficult  to  obtain  and  still  more  difficult  to  deter- 
mine. So  rapid  has  been  the  development  of  the  art  in  the 
gas,  electric  and  telephone  fields1  that  what  might  be  a 
reasonable  rate  charge  for  one  year  would  be  wholly  un- 
reasonable thereafter.  For  example,  both  Milwaukee  and 
Superior,  the  two  largest  cities  of  the  state,  originally 
granted  street-car  franchises  containing  rate  of  fare  limita- 
tions which  the  Railroad  Commission  has  now  found  ex- 
cessive.2 Litigation  to  determine  whether  these  rates  can 
be  lowered  by  the  state  amending  the  franchise  is  pending 
in  the  United  States  Supreme  Court,  the  Wisconsin  Su- 
preme Court  having  previously  sustained  the  validity  of  the 
Commission's  reduction.3  Thus,  using  ordinary  prudence 
and  judgment,  the  city  officials  were  unable  to  see  far 
enough  in  the  future  to  compass  the  situation. 

"In  1885,  the  average  price  of  illuminating  gas  in  this 
country  was  a  little  over  $2.00  per  1,000  cubic  feet,"  says 
George  C.  Mathews,  chief  of  the  statistical  department  of 
the  Wisconsin  Railroad  Commission,  in  discussing  the  un- 
certainties in  making  franchise  rates.4  "In  1907  the  aver- 
age price  was  $1.37.  The  average  price  of  all  gas  in  1885 
was  about  $1.84,  and  in  1907  it  was  $1.10. 

"Aside  from  the  development  of  the  industry,  however, 
there  is  another  feature  which  very  often  prevents  rates 
fixed  by  franchise  from  being  satisfactory.  From  the  point 
of  view  of  a  public  utility  there  is  almost  no  comparison 
between  the  average  city  of  6,000,  and  the  average  city  of 

1  Commissioner  Koemer,  Address,  Camp  Co-operation  Book  of  Pro- 
ceedings, 1913,  74. 

2  City  of  Milwaukee  v.  T.  M.  E.  R.  $  L.  Co.,  1912,  10  W.  R.  C.  R., 
1-305 ;  Superior  Commercial  Club  et  al.  v.  Duluth  Street  Railway  Co., 
1912,  12  W.  R.  C.  R.,  No.  R.  577. 

3 153  Wisconsin  Reports,  592. 

4  G.  C.  Mathews,  Address,  Proceedings  of  the  First  Annual  Con- 
vention of  the  League  of  Municipalities  of  Minnesota  (Oct.  17, 
1913),  124. 


292     RAILROADS  AND  PUBLIC  UTILITIES 

20,000.  Yet  in  the  twenty  years  from  1890  to  1910  the 
city  of  Kenosha,  Wisconsin,  grew  in  population  from  6,530 
to  21,371.  The  condition  under  which  public  utility  serv- 
ice was  furnished  in  that  city  underwent  an  entire  change. 
Now  suppose  a  twenty-year  franchise  had  been  granted  in 
1890  fixing  the  rates  for  service,  of  what  possible  use  would 
it  have  been  in  1910?  In  some  of  the  western  states  the 
conditions  are  even  more  extreme.  The  city  of  Spokane 
grew  from  less  than  20,000  in  1890  to  over  100,000  in  1910. 
So  we  see  that  when  it  comes  to  the  regulation  of  rates 
and  service  by  franchise,  this  regulation  is  of  practically 
no  value,  because  when  the  franchise  is  granted,  the  city 
does  not  generally  possess  facts  which  enable  it  to  estab- 
lish reasonable  rates  and  adequate  standards  of  service 
because  the  changes  in  the  industry  make  the  standards  of 
service  and  the  rates  of  to-day  entirely  inadequate  and 
unreasonable  before  the  expiration  of  the  franchise,  and 
because  the  growth  of  the  city  itself  changes  conditions 
under  which  service  is  furnished." 

Confronted  with  the  defects  of  franchise  regulation, 
supporters  of  local  control  contend  that  the  same  power 
of  regulation  should  be  granted  to  the  local  unit  as  is 
enjoyed  by  the  state  over  the  railroads.  It  was  in  response 
to  this  sentiment  that  the  legislature  incorporated  the 
following  provision  in  the  original  Public  Utility  Law : 

Section  1797  m-87.  Every  municipal  council  shall  have  power 
(1)  to  determine  by  contract,  ordinance  or  otherwise  the  quality 
and  character  of  each  kind  of  product  or  service  to  be  furnished 
or  rendered  by  any  public  utility  furnishing  any  product  of 
service  within  said  municipality  and  all  other  terms  and  condi- 
tions not  inconsistent  with  sections  1797  m-1  to  1797  m-109,  in- 
clusive, upon  which  such  public  utility  may  be  permitted  to  oc- 
cupy the  streets,  highways  or  other  public  property  within  such 
municipality,  and  such  contract,  ordinance  or  other  determination 
of  such  municipality  shall  be  in  foi-ce  and  prima  facie  reason- 


STATE  VERSUS  LOCAL  CONTROL         293 

able.  Upon  complaint  made  by  sucb  public  utility  or  by  any 
qualified  complainant  as  provided  in  section  1797  m-43,  the  com- 
mission shall  set  a  hearing  as  provided  in  sections  1797  m-45  and 
1797  m-46  and  if  it  shall  find  such  contract,  ordinance  or  other 
determination  to  be  unreasonable,  such  contract,  ordinance  or 
other  determination  shall  be  void. 

(2)  To  require  of  any  public  utility  by  ordinance  or  other- 
wise such  additions  and  extensions  to  its  physical  plant  within 
said  municipality  as  shall  be  reasonable  and  necessary  in  the 
interest  of  the  public,  and  to  designate  the  location  and  nature 
of  all  such  additions  and  extensions,  the  time  within  which  they 
must  be  completed  and  all  conditions  under  which  they  must  be 
constructed  subject  to  review  by  the  commission  as  provided  in 
subdivision  1  of  this  section. 

(3)  To  provide  for  a  penalty  for  non-compliance  with  the 
provisions  of  any  ordinance  or  resolution  adopted  pursuant  to  the 
provisions  hereof. 

(4)  The  power  and  authority  granted  in  this  section  shall  ex- 
ist and  be  vested  in  said  municipalities,  anything  in  sections  1797 
m-1  to  1797  m-109,  inclusive,  to  the  contrary  notwithstanding. 

Thus  the  same  broad  powers  of  regulation  are  first 
given  to  the  city  to  use,  if  it  chooses,  leaving  to  the  Rail- 
road Commission  only  the  right  to  review  such  regulations 
upon  complaint.  Whether  it  is  that  the  municipal  authori- 
ties feel  that  these  regulatory  powers  can  most  effectively 
be  exercised  by  a  state  commission,  which  is  not  influenced 
by  local  prejudices,  or  that  the  heavy  expense  to  employ 
experts  to  make  investigations  and  valuations  is  too  large, 
has  not  been  explained.  The  fact  remains  that  practically 
no  local  authority  has  availed  itself  of  the  power  of  regu- 
lating. This  condition  obtains  also  in  the  other  states 
where  public  utility  commissions  with  powers  similar  to 
that  in  Wisconsin  have  been  created. 

To  determine  the  feasibility  of  local  or  state  control 
it  is  necessary  to  review  the  problems  confronted  in  the 


294     RAILROADS  AND  PUBLIC  UTILITIES 

field  of  public  utility  regulation.  There  are  three  primary 
considerations:  (a)  service;  (b)  rates,  and  (c)  security 
issues. 

As  already  explained  in  the  chapter  on  service  the  state 
has  fixed  standards  for  all  classes  of  utilities  and  enforces 
them  through  a  system  of  inspection.  Reference  to  the 
accomplishments  has  also  been  made.1  That  local  regula- 
tion, mostly  through  franchise  provision,  prior  to  the  pas- 
sage of  the  utility  law,  was  ineffective,  has  also  been  illus- 
trated by  statistics.  Every  rate  case  involves  the  question 
of  service.2  The  existence  of  these  inequalities  is  well 
illustrated  in  the  case  of  the  City  of  Kaukauna  v.  Kau- 
Jcauna  Gas,  Electric  Light  &  Power  Company,  in  which  the 
Commission  said : 

The  evidence  shows  conclusively  that  respondent's  plant  3  and 
distribution  system  are  wholly  inadequate  to  meet  the  reasonable 
requirements  of  the  city.  The  distribution  system  was  poorly 
constructed  in  the  first  instance  and  has  never  been  properly 
maintained  since.  It  requires  reconstruction.  The  power  plant 
is  in  little  better  condition  than  the  distribution  system.  Accord- 
ing to  the  proposed  plans  of  the  company  for  altering  and  im- 
proving the  power  plant,  it  would  seem  that  much  of  the  plant 
is  obsolete.  It  lacks  many  appliances  necessary  to  the  rendering 
of  good  service.  The  service  rendered  to  the  public  in  the  past 
has  not  only  been  unreasonably  inadequate,  but  much  of  the  time 
intolerable.  The  rules  prescribed  by  the  Commission  concern- 
ing the  standard  of  service  required  of  every  such  utility  have 
not  been  observed,  and  could  not  be  observed  until  extensive  work 
of  repair,  reconstruction  and  extension  of  the  power  plant  and 
distribution  system  was  first  performed.     Further  delay  in  put- 

1  See  Ch.  V;  also  Ch.  XX,  showing  service  improvements  in  muni- 
cipal plants  under  state  regulation. 

1  In  re  Application  Manitowoc  Gas  Company  for  Authority  to 
Equalise  Bates,  1908,  3  W.  R.  C.  R.,  163,  180. 

3  City  of  Kaukauna  v.  Kaukauna  Gas,  Electric  Light  $•  Power  Co., 
1910,  5  W.  R.  C.  R.,  703. 


STATE  VERSUS  LOCAL  CONTROL    295 

ting  the  power  plant  and  distribution  system  in  efficient  oper- 
ating condition  will  not  be  endured.  The  public  is  entitled  to 
reasonably  adequate  service. 

No  extensive  discussion  will  be  undertaken  in  this 
connection  of  the  subject  of  rates.  The  facts  upon  which 
rates  are  based  and  the  method  of  computing  them  have 
already  been  outlined.  A  few  of  the  cases  before  the  Com- 
mission will  be  referred  to,  however,  to  clarify  the  elemen- 
tary principles,  that  the  reader  may  be  able  to  judge  as  to 
whether  the  locality  would  be  able  at  a  minimum  of  expense 
to  secure  the  facts  necessary  to  just  and  reasonable  rate 
regulation.  Rates  to  be  just  must  eliminate  discriminations 
as  nearly  as  possible ;  must  aid  in  securing  the  maximum 
development  of  the  business;  must  secure  the  lowest  rates 
possible  for  the  service  furnished  and  at  the  same  time 
provide  a  fair  return  on  the  actual  investment.1  How 
extensive  public  utility  rate  discriminations  were  before  the 
law  was  passed  will  never  be  mathematically  known.  It 
has  been  estimated  that  the  favors  granted  by  local  utility 
corporations  amounted  to  over  $2,000,000  a  year.2  One 
year  after  the  law  was  passed,  Commissioner  B.  IT.  Meyer 
said :  ' '  The  whole  state  was  literally  streaked  and  plas- 
tered with  discriminations  in  the  rates  of  utilities ;  and  in 
all  the  rest  of  the  country,  where  the  extent  of  such  dis- 
criminations has  not  yet  been  determined  as  it  has  in  Wis- 
consin, it  is  quite  probable  that  discriminations  similar  in 
character  and  extent  likewise  exist.  .  .  .  For  thirty-two 
of  the  reporting  (telephone)  companies,  eight  out  of  every 
one  hundred  subscribers  received  free  or  reduced  service. ' ' 
Seven  big  consumers  were  served  water  in  one  city  of  4,000 

1  Many  of  the  facts  upon  which  this  portion  of  the  chapter  is 
based  are  taken  from  a  report  on  State  versus  Local  Control  of  Pub- 
lic Utilities  (unpublished  at  this  time)  made  by  W.  C.  Eeyer,  a  mem- 
ber of  the  Commission  's  staff,  to  the  Commission. 

2  F.  C.  Howe,  "Wisconsin  an  Experiment  in  Democracy,"  73. 


296     RAILROADS  AND  PUBLIC  UTILITIES 

inhabitants  without  charge.  In  Madison,  the  capital  of 
the  state,  1,360  telephone  users  out  of  5,000  received  re- 
ductions amounting-  to  $1,120  a  month.  Discriminations 
also  existed  between  public  and  private  users;  between 
metered  and  unmetered  users  and  between  power  and  light 
consumers.  In  Ashland  the  city  was  paying  about  $8,400 
less  for  water  than  its  share.1  The  electric  light  investiga- 
tion in  Beloit  showed  "an  average  revenue  per  kilowatt 
hour  from  residence  consumers  of  13.6  cents,  from  saloons 
of  5.9  cents,  stores  6.7  cents,  and  hotels  6.1  cents.  The 
facts  show  quite  clearly  that  the  residence  consumers  in 
Beloit  have  been  compelled  under  existing  rate  schedules 
to  bear  more  than  their  proper  share  of  the  cost  of  the 
service  rendered. ' ' 2 

Enough  has  perhaps  been  said  to  illustrate  the  extent 
and  viciousness  of  discriminations  in  rate  schedules.  Regu- 
lation whether  by  the  locality  or  the  state  must  be  of  the 
character  that  will  detect  these  inequalities  and  eliminate 
them,  with  such  adjustments  that  each  consumer  shall  be 
required  to  meet  his  proper  share  of  the  expenses  of  the 
utility.3 

Directly  bearing  upon  the  rate  question  is  the  develop- 
ment of  the  business.  Rates  may  be  so  high  as  to  make 
the  use  of  the  service  prohibitive;  or  one  class  of  rates 
may  be  out  of  proportion  with  the  rates  for  other  classes, 
causing  a  lack  of  development  within  that  class.  Equit- 
able rates  encourage  the  widest  use  of  the  service  with 
proper  regard  for  each  class  of  users. 

After  the  decision  was  announced  on  July  19,  1911,  in 


1City  of  Ashland  v.  Ashland  Water  Co.,  1909,  4  W.  E.  C.  E.,  297. 

2  City  of  Beloit  v.  Beloit  Water,  Gas  and  Electric  Co.,  1911,  7  W. 
E.  C.  E,,  376. 

3  For  a  clear  presentation  of  arguments  and  statistics  in  favor 
of  limited  state  control  and  wider  local  control  see  Dr.  Delos  F. 
Wilcox,  Article  in  National  Municipal  Beview,  III,  No.   1,   1911. 


STATE  VERSUS  LOCAL  CONTROL 


297 


the  Beloit  case  cited  above,  readjusting  the  rates,  a  change 
occurred  that  demonstrates  the  importance  of  the  Commis- 
sion giving  cognizance  to  the  principle  of  saturation  of 
territory. 


Residence 
Consumers 

Kilowatt    Hours 
Consumed 

Average 

rate  per 

kilowatt 

hour 

Total  Revenue 

Year 
ending 
June  30 

Number 

Per  cent 
increase 

over 
previous 

years 

Amount 

Per  cent 

increase 
over 

previous 
year 

Amount 

Per   cent 

increase 

over 

previous 
year 

1909 

1910 

1911 

1912 

388 
449 
501 
595 
851 

13.0 
11.5 

18.7 
43.0 

135,154 
178,840 
192,097 
233,785 
300,513 

32.3 

7.7 

21.3 

28.1 

80.1238 
0.  108 
0.108 
0.094 

0.0895 

$10,740.11 
19,383.46 
20,893.35 
22,000.43 

20,898.71 

ih',7 

7.5 

5.3 

22.3 

Notice  the  rapid  development  of  business  under  the 
adjustment  of  rates  of  residence  users.  During  the  year 
1913  the  number  of  residence  consumers  increased  43  per 
cent,  the  consumption  28.1  per  cent  and  the  revenues  22.3 
per  cent.  For  the  year  previous  there  was  also  a  decided 
increase. 

The  necessity  of  allowing  the  utility  a  reasonable  return 
upon  its  investment,  to  attract  sufficient  capital  for  a  full 
development  of  the  business,  has  already  been  fully  ex- 
plained in  an  earlier  chapter.  It  is  an  element  to  which 
every  regulating  body  must  give  recognition.  Capital  will 
not  enter  except  under  terms  as  reasonable  as  are  to  be 
found  for  the  same  risk  in  other  enterprises. 

The  story  of  the  looting  of  such  railroads  as  the  New 
Haven,  the  'Frisco  and  other  lines;  the  watering  of  the 
stocks  of  public  service  corporations  and  other  schemes  of 
frenzied  finance,  have  been  too  common  not  to  attract  the 
attention  of  state  and  national  legislatures.  Few  will  con- 
tend that  the  locality  should  regulate  security  issues. 
Granted  the  power  it  might  be  neglected  as  was  public 


298     RAILROADS  AND  PUBLIC  UTILITIES 

utility  regulation  before  the  era  of  state  control.  It  is 
the  nullification  of  this  regulation  that  is  most  desired  by 
financial  speculators.  In  recent  years  many  states  have 
passed  laws  delegating  some  state  agency  or  commission 
to  supervise  the  issues  of  stocks  and  bonds.  Its  im- 
portance is  well  settled  in  the  public  mind. 

The  question  then  is :  Can  the  locality  regulate  public 
utility  service,  rates  and  securities  as  adequately  as  a 
state  commission? 

Among  the  more  important  reasons  why  local  regula- 
tion cannot  effectively  x  meet  these  problems  are : 

I.  Necessary  information  will  not  be  available. 

II.  Local  regulation  is  too  expensive  for  the  locality  to 
maintain  a  competent  staff  necessary  to  secure  this  informa- 
tion. 

III.  The  municipality  is  too  limited  a  unit  of  control. 

IV.  Politics  and  local  bias  affect  local  regulation. 

V.  There  has  been  an  inability  of  localities  to  adjust 
rates  in  the  past. 

The  necessity  of  scientific  and  uniform  accounting  in 
public  utility  regulation  is  at  once  apparent.  There  must 
be  accurate  cost  records  based  upon  proper  charges.  Be- 
fore the  day  of  state  regulation  in  Wisconsin  an  examina- 
tion of  the  accounting  methods  used  by  many  of  the  utilities 
disclosed  a  lack  of  understanding  of  the  items  in  the  mak- 
ing of  the  charges ;  no  recognition  of  the  distinction  between 
repairs  and  replacements,  between  construction  costs  and 
operation  expense,  and  often  a  mixup  of  other  similar 
transactions  that  unless  corrected  would  obscure  the  true 
profits  of  the  business.     Even  the  municipal  plants  have 

1  The  five  reasons  why  local  regulation  is  ineffective  were  worked 
out  in  the  brief  to  the  Commission  by  W.  C.  Reyer  of  the  Commis- 
sion 's  staff.  Much  of  the  information  presented  here  has  been  ob- 
tained from  that  report  and  the  examination  of  eases  cited. 


STATE  VERSUS  LOCAL  CONTROL         299 

not  maintained  accurate  records  in  the  past.  The  Commis- 
sion found  only  10  per  cent  of  the  municipalities,  operat- 
ing water  and  electric  plants,  valued  in  the  aggregate  at 
$16,000,000,  with  records  sufficiently  definite  to  determine 
the  results  of  operation.1  The  conclusion  would  seem 
inevitable  that  when  municipal  utility  records  need  such 
general  supervision  from  outside,  it  would  not  be  inherent 
in  the  city  to  accurately  supervise  the  records  of  private 
utilities  operated  within  its  borders. 

Moreover,  scientific  records  kept  on  a  uniform  basis 
for  all  cities  are  necessary  for  comparative  purposes  in 
rate-making.  The  previous  chapters  on  accounting  and 
operating  expenses  illustrate  the  invaluable  use  to  which 
these  data  are  applied  in  determining  normal  costs  for 
every  step  in  the  process  of  operation.2  Abnormalities  are 
eliminated  and  utility  companies  are  forced  into  comparison 
on  a  strict  business  basis. 

Not  only  do  the  cities  lack  the  authority  to  enforce 
uniform  accounting  systems  upon  other  cities,  but  the  cost  ' 
of  obtaining,  correcting  and  compiling  the  necessary  in- 
formation would  make  it  almost  prohibitive.  The  col- 
lection of  such  statistics  requires  the  services  of  a  com- 
petent staff  for  small  as  well  as  the  larger  cities.  There 
are  268  cities  in  the  state  to  which  some  form  of  utility 
service — water,  gas,  electric  or  a  combination  of  these — is 
furnished.  Two  hundred  and  fifty  of  these  cities  have 
populations  of  less  than  10,000  inhabitants,  and  only  one 
has  over  50,000  people  according  to  the  last  census.  Is  it 
reasonable  to  expect  that  the  two  hundred  and  fifty  smaller 
cities  could  bear  this  heavy  expense?  Competent  auditors 
in  private  practice  charge  from  $20  to  $50  a  day.    Consult- 

1  Mathews,  Minnesota  address  before  League  of  Municipalities, 
op.  cit.;  also  see  discussion  and  table  of  municipal  plants,  Ch.  XX. 

2  See  Table  I,  Ch.  VI ;  also  City  of  Racine  v.  Bacine  Gas  Light 
Co.,  1911,  6  W.  E.  C.  E.,  270. 


300     RAILROADS  AND  PUBLIC  UTILITIES 

ing  engineers  charge  from  two  to  four  mills  on  the  dollar 
for  making  valuations.  Because  the  Wisconsin  Commission 
maintains  a  regular  staff  the  valuations  made  by  it  cost 
from  one  to  two  mills  on  a  dollar.  Valuations  of  gas  and 
water  plants  in  small  cities  under  5,000  inhabitants  cost 
the  Commission  from  $80  to  $160.  Should  these  valua- 
tions be  made  privately  the  cost  would  be  several  times 
greater.  The  recent  expert  investigation  of  gas  rates  in 
St.  Paul,  Minnesota,  cost  the  municipality  $55,000,  and 
the  matter  is  now  in  the  courts  where  added  expense  will 
be  incurred.  The  valuation  of  the  Milwaukee  Gas  plant, 
a  property  of  about  the  same  size,  cost  the  Wisconsin  Com- 
mission $8,500  and  the  Milwaukee  street-car  company  has 
properties  twice  as  valuable  as  the  gas  company  in  St. 
Paul,  and  that  valuation  only  cost  the  Commission  $11,000. 
The  state  can  make  the  valuation  cheaper  and  there  is 
seldom  the  court  contest  aftermath.  Because  of  the  ex- 
pense, undoubtedly  the  result  of  local  regulation  in  Wis- 
consin would  be  that  the  439,789  people  living  in  the 
two  hundred  and  fifty  cities  under  10,000  inhabitants 
would  go  without  any  utility  regulation  whatever.  This 
would  be  a  return  to  conditions  that  existed  before  the 
Public  Utility  Law  was  passed,  when  discriminations  and 
inequalities  were  rampant. 

But  a  still  more  serious  defect  is  to  be  found  in  the 
fact  that  the  locality  is  not  the  natural  unit  of  control. 
The  argument  strikes  with  particular  force  municipal 
plants  that  extend  beyond  municipal  limits.  A  telephone 
utility,  with  extensive  toll  connections,  breaks  over  the 
borders  of  geographical  subdivisions ;  an  interurban  system 
extends  through  several  towns,  and  electricity  for  lighting 
and  power  purposes  may  be  transmitted  across  a  state, 
serving  many  villages  and  cities.  This  view  is  expressed 
by  Delos  F.  Wilcox,  a  recognized  authority  on  public 
utility  regulation. 


STATE  VERSUS  LOCAL  CONTROL    301 

After  all  the  day  of  walled  cities  is  past  and  now  an  urban 
community  x  is  primarily  a  congested  spot  on  the  state  map,  a 
center  of  population  and  industrial  activity  intimately  related  to 
the  personal  and  property  interests  of  all  the  citizens  within  its 
sphere  of  influence,  which  often  extends  to  and  beyond  the  boun- 
daries of  the  commonwealth  itself.  Public  utilities,  although  still 
comparatively  simple  industries,  have  grown  far  enough  beyond 
merely  local  bounds  to  require  complex  governmental  machinery 
to  operate  or  regulate  them. 

The  original  power  of  regulation  is  inherent  in  the 
state.  "A  municipal  corporation  is  a  public  instrumental- 
ity established  in  aid  of  the  administration  of  the  affairs 
of  the  state. "  2  A  state  commission  can  exercise  no  greater 
power  than  the  legislature  endows  it  with.  A  local  commis- 
sion, if  given  the  power,  cannot  overstep  its  boundaries  in 
the  enforcement  of  its  mandates.  A  review  of  actual 
conditions  makes  the  analogy  plain.  Only  6.38  per  cent, 
out  of  a  total  of  642  telephone  exchanges  in  Wisconsin, 
operate  in  urban  communities ;  93.62  extend  beyond  muni- 
cipal limits.  Under  local  regulation  over  nine-tenths  of 
the  telephone  systems  would  be  able  to  escape  complete 
regulation  by  one  body,  or  be  subjected  to  as  many  different 
systems  of  regulation  as  there  were  communities  through 
which  they  passed.  The  authority  and  achievements  of  the 
Commission  in  enforcing  physical  connection  between 
separate  exchanges  for  toll  and  local  service  in  a  score  of 
communities,  as  already  explained,  would  have  been  a  prac- 
tical impossibility  under  local  regulation. 

Similar  conditions  appertain  among  Wisconsin  gas  and 
electric  companies 3  and  every  year  brings   further   con- 

1  Wilcox,  "Municipal  Franchises,"  II,  704. 

2  Covington  v.  Kentucky,  173  U.  S.,  241. 

3 Wisconsin  gas  plants  that  serve  more  than  one  community  are: 
Eacine  Gas  Co. — supplies  Racine  and  sells  to  Kenosha;  Wisconsin 
Traction,  Light,  Heat  &  Power  Co. — supplies  Appleton,  Menasha  and 


302     RAILROADS  AND  PUBLIC  UTILITIES 

solidations  of  companies  that  make  the  problem  of  local 
regulation  the  more  complex.  As  a  culmination  of  this 
movement  of  consolidation  there  are  some  who  predict  that 
a  movement  will  arise  for  the  state  ownership  of  the  inter- 
municipal  utilities  such  as  interurban  railways  and  traction 
lines.1  Such  consolidations  are  a  condition  not  only  typical 
of  Wisconsin  but  of  other  states,  as  an  examination  of 
the  attached  maps  for  Wisconsin,  Illinois,  Iowa  and  Michi- 
gan illustrate.  The  Commonwealth  Power  Company  of 
Michigan  supplies  twenty-one  cities  and  villages ;  the  Grand 
Rapids-Muskegon  Power  Company  of  Michigan  supplies 
fourteen  ; 2  the  Iowa  Railway  and  Light  Company  furnished 
gas,  electric  or  electric  railway  service  to  forty-eight  cities 
and  villages;  the  Central  Illinois  Public  Service  Company 
has  properties  in  one  hundred  cities  and  villages.  To  carry 
out  the  principle  of  local  control  there  would  be  forty-eight 
bodies  regulating  one  company  in  Iowa  and  one  hundred 

Neenah;  Milwaukee  Gas  Light  Co. — supplies  Milwaukee  and  sells  to 
Milwaukee  (Welsbach  Street  Lighting  Co.  of  America),  Wauwatosa 
(Wauwatosa  Gas.  Co.),  and  West  Allis  (West  Allis  Gas  Co.). 

Some  electric  utilities  that  extend  beyond  municipal  borders  in 
Wisconsin  are:  Interstate  Light  and  Power  Co. — operates  plants  in 
Platteville  and  Shullsburg  and  sells  current  to  municipal  plants  at 
Benton,  Cuba  City  and  Hazel  Green ;  Wausau  Street  Railway  Co. — op- 
erates in  Wausau,  Scofield  and  Rothschild;  Wisconsin  Traction, 
Light,  Heat  &  Power  Co. — operates  in  Appleton,  Menasha  and  Nee- 
nah; Chippewa  Valley  Railway  Light  and  Power  Co. — operates  in 
Chippewa  Falls,  Eau  Claire,  Elk  Mound,  Menomonie  and  Altoona  and 
sells  power  to  plants  in  Bloomer,  Cadott  and  Elmwood;  and  the  Mil- 
waukee Light,  Heat  and  Traction  Co. — operates  in  Cudahy,  E.  Mil- 
waukee, E.  Troy,  Hales  Corners,  Mukwanago,  Pewaukee,  Racine, 
Rochester,  So.  Milwaukee,  St.  Francis,  Waterford,  Wauwatosa,  West 
Allis,  West  Milwaukee  and  White  Fish   Bay. 

1Delos  F.  Wilcox,  "Effect  of  State  Regulation  on  the  Municipal 
Ownership  Movement,"  Annals  of  American  Academy  of  Political 
and  Social  Science,  May,  1914,  84. 

2  The  map  of  Michigan  was  compiled  from  information  secured 
from  the  Hodenpyl,  Hardy  &  Co.,  Detroit;  for  Illinois  from  a  map 
appearing  in  the  Electrical  World,  May  31,  1913,  I,  146;  and  for 
Iowa  and  Wisconsin  from  Moody's  Manual,  14th  ed. 


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303 


304     RAILROADS  AND  PUBLIC  UTILITIES 

commissions  regulating  parts  of  the  one   corporation  in 
Illinois. 

Milwaukee's  conditions  present  a  like  complexity  as  an 
investigation  by  Mr.  Mathews  shows: 

"Perhaps  a  brief  outline  of  some  of  the  steps  to  be  taken  1 
in  regulating  electric  railway  rates  in  Milwaukee  will  show  the 
defects  in  local  control.  There  are  fourteen  power  plants  and 
substations,  some  of  which  supply  current  for  both  railway  and 
lighting,  and  supply  steam  for  heating.  There  are  thousands 
of  feet  of  transmission  lines  overhead  and  underground,  which 
are  used  jointly  for  lighting  and  railway.  There  are  GOO  cars, 
360  miles  of  track,  and  over  360  miles  of  trolley  wire,  of  which 
large  portions  are  used  interchangeably  by  the  railway  systems 
which  give  interurban  service  in  Milwaukee  over  18  lines,  in 
Racine  over  4  lines,  in  Watertown  over  1  line,  and  operate  9  sub- 
urban and  3  interurban  lines.  The  Commerce  Street  power  sta- 
tion supplies  current  for  city  lighting,  city  railway,  and  the  in- 
terurban railways  within  a  radius  of  20  miles.  Shops  and  equip- 
ment in  Milwaukee  are  used  for  the  entire  system.  Moreover 
the  Milwaukee  system  buys  hydroelectric  power  from  the  Kil- 
bourn  dam,  over  100  miles  distant,  which  would  be  entirely  be- 
yond city  control.  It  is  easy  enough  to  say  that  the  city  should 
have  control  within  its  own  limits,  but  the  Milwaukee  system 
serves  not  only  the  city,  but  a  large  portion  of  the  State." 

The  inability  of  a  system  of  local  control  confined  to 
narrow  limits  to  cope  with  the  utility  problem  would  ap- 
pear incontrovertible. 

There  are  other  disadvantages.  Under  local  control 
public  utilities  may  become  political   footballs.2     Chicago 

1  Mathews,  Address  at  St.  Paul,  op.  cit. 

2  Wilcox,  ' '  The  Control  of  Public  Service  Corporations  in  De- 
troit,"  Annals  of  the  American  Academy  of  Political  and  Social 
Science,  XL,  576-592;  Gray,  "The  Gas  Supply  in  Boston,"  Quar- 
terly Journal  of  Economics,  XII,  419-446;  XIII,  292-313;  XIV,  87- 
120;  Hotchkiss,  "Chicago  Traction,  a  Study  in  Political  Evolution," 
Annals  of  the  American  Academy  of  Political  and  Social  Science, 
XXVIII,  385-404;   XXXI,  619-629. 


305 


306     RAILROADS  AND  PUBLIC  UTILITIES 

recently  waged  a  stirring  municipal  campaign  over  gas 
rates.  The  party  out  of  power  will  promise  most  any 
reform  of  a  public  utility,  regardless  of  its  reasonable- 
ness, to  turn  an  election.  State  control  helps  to  take  the 
utility  out  of  politics  and  gives  outside,  disinterested  par- 
ties an  opportunity  to  study  the  plant  and  local  conditions, 
free  from  party  strife  and  political  bias,  and  order  adjust- 
ments of  service  and  rates  reasonable  to  both  the  utility 
and  the  public. 

The  inability  of  local  managements  to  adjust  rates  in 
the  past  is  shown  by  the  discriminatory  schedules  in  effect 
at  the  time  the  Wisconsin  Public  Utility  Law  was  passed. 
This  is  another  factor  that  militates  against  local  control. 
A  single  case  out  of  many  that  have  come  before  the  Com- 
mission will  illustrate: 

The  applicant  in  this  case  stated  in  its  petition  that J  it  de- 
sired to  make  such  changes  in  its  rate  schedules  as  to  enable  it  to 
more  fully  extend  its  business.  At  the  hearing  in  the  matter  it 
was  shown  that  the  present  schedules  were  not,  on  the  whole,  so 
adjusted  as  to  meet  local  requirements.  These  facts  were  also 
substantiated  by  the  further  investigation  into  the  situation  which 
was  made  by  this  Commission.  For  these  reasons  the  applicant 
was  authorized  to  adjust  its  rate  schedules  on  the  basis  outlined 
in  the  order  in  this  case. 

As  described  in  the  previous  chapter  many  of  the 
schedules  including  rates  for  municipal  plants  submitted 
by  utilities  to  the  Commission  for  approval  prove  on  in- 
vestigation to  be  regressive  and  discriminatory.  Rates  to 
be  just  must  be  scientifically  made,  after  an  investigation 
and  an  analysis  of  the  facts,  which  the  locality  is  seldom 
able  to  obtain,  because  of  their  inavailability  or  expense  of 

1  In  re  Application  of  Stoughton  Municipal  Electric  Light  System 
for  Authority  to  Increase  Bates,  1909,  3  W.  E.  C.  R.,  484. 


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307 


308     RAILROADS  AND  PUBLIC  UTILITIES 

obtaining.  That  this  is  coming  to  be  a  recognized  fact  by 
cities  is  indicated  by  at  least  a  dozen  voluntary  requests 
by  municipal  and  private  bodies  to  the  Commission  to 
make  adjustments  for  them.  Efforts  to  change  the  present 
state  control  system  have  been  repeatedly  defeated. 

Those  who  are  best  qualified  to  judge  are  not  especially 
enthusiastic  over  the  method  of  local  regulation  attempted 
through  the  passage  of  ordinances  by  a  common  council. 
This  is  a  third  plan  of  local  control.  Such  a  system  has 
been  tried  in  Iowa.  In  the  case  of  the  Des  Moines  Water 
Company  v.  City  of  Des  Moines1  involving  the  validity 
of  an  ordinance  fixing  water  rates,  Judge  McPherson  of 
the  federal  court  spoke  thus  of  the  delays  and  expenses 
incident  to  such  proceedings  in  court: 

It  is  now  more  than  three  years  since  the  passage  of  this 
ordinance.  This  case  illustrates  the  evils  in  connection  with  the 
fixing  of  rates  by  municipalities  to  govern  public  utility  corpora- 
tions, ...  by  the  time  this  case  is  decided  by  an  appellant 
coui't,  at  least  four  years  will  have  elapsed  from  the  passage  of 
the  ordinance  until  the  matter  is  put  at  rest  by  the  courts.   .    .    . 

It  is  well  known  by  all  informed  men  that  city  councils  neces- 
sarily adopt  rates  with  but  little  or  no  investigation  as  to  what 
rates  ought  to  be  fixed.  The  result  is  we  have  ordinances  fixing 
rates  based  upon  but  little  intelligent  effort  for  the  ascertainment 
of  the  facts.  Some  of  the  states  like  New  York,  Massachusetts 
and  Wisconsin,  have  state  commissions  of  competent  men,  who 
give  public  hearings,  and  who  do  nothing  behind  doors,  nor  in 
secrecy  ...  a  commission  with  no  member  interested  as  a 
taxpayer  of  the  city,  and  with  no  member  subject  to  influences 
other  than  the  ascertainment  of  the  truth  and  the  facts.  Rates 
are  thus  fixed  with  which  most  fair-minded  people  are  ready  to 
acquiesce.  It  is  strange  that  we  have  no  such  legislation  and  no 
such  commissions  in  Iowa. 

1  Des  Moines  Water  Co.  v.  City  of  Des  Moines,  decided  Sept.  16, 
1911,  192  Fed.,  193. 


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309 


310     RAILROADS  AND  PUBLIC  UTILITIES 

Again  in  the  later  case  of  Des  Moines  Gas  Company  v. 
City  of  Des  Moines,1  which  involved  the  validity  of  a  city 
ordinance  fixing  rates  for  gas,  the  same  court  said : 

Much  of  this  kind  of  litigation,  and  practically  all  of  the  ex- 
pense, would  be  avoided  if  Iowa,  like  so  many  of  the  other,  in- 
cluding neighboring  states,  had  an  impartial  and  city  non-resident 
commission  or  tribunal,  with  power  to  fix  these  rates  at  a  public 
hearing,  all  interested  parties  present,  with  the  tribunal  selecting 
its  own  engineers,  auditors  and  accountants.  Too  often  we  have 
selfish,  partisan  prejudice,  and  unreliable  experts  engaged  for 
weeks  at  a  time,  at  $100  or  more  and  expenses  per  day,  exagger- 
ating their  importance,  and  making  the  successful  party  in  fact  a 
loser.  With  all  our  boasted  advancement,  Iowa  is  a  laggard  in 
this  matter,  and  will  continue  as  such  until  these  rate-makings 
are  taken  from  the  power  of  city  councils.  Appeals  to  the 
courts  will  seldom  be  taken  from  the  findings  of  such  a  tribunal. 

Aside  from  the  benefits  of  state  regulation  over  local 
control,  suggested  by  the  court  quoted  above,  there  are 
other  advantages  but  these  have  been  covered  in  such 
detail  already  in  the  volume  that  further  reiteration  here 
is  unnecessary.  It  was  to  escape  the  evils  of  local  control 
that  the  Wisconsin  Public  Utility  Law  was  enacted.2  State 
regulation  is  not  undemocratic ;  it  does  not  interfere  with 
the  powers  of  the  community  but  aids  and  supervises  them. 
As  the  decision  in  the  Madison  Gas  case  shows,  the  state 

1  Des  Moines  Gas  Company  v.  City  of  Des  Moines,  decided  Aug. 
12,  1912,  199  Fed.,  204. 

2  At  the  request  of  citizens  of  Madison  the  common  council  sought 
to  compel  the  gas  company  to  lower  its  rates.  The  gas  company 
asked  the  circuit  court  for  an  order  preventing  the  city  from  exam- 
ining the  books  of  the  company,  which  was  refused  by  the  circuit 
court,  but  the  supreme  court  remanded  the  cause  with  directions  to 
dismiss  the  complaint  in  1906.  Occurring  in  the  capital  city  of  the 
state,  this  case  which  showed  the  helplessness  of  a  city  to  obtain  just 
treatment  for  its  citizens,  aroused  the  feeling  that  culminated  in  the 
enactment  of  the  Public  Utility  Law  in  1907.  See  City  of  Madi- 
son v.  Madison  Gas  <r  Electric  Co.,  108  N.  W.  Kep.,  65. 


STATE  VERSUS  LOCAL  CONTROL         311 

Public  Utility  Law  gave  the  communities  a  power  of  regu- 
lation, heretofore  reposed  in  the  state  legislature,  and  which 
the  municipalities  never  before  possessed. 

With  local  regulation  an  aggrieved  utility  user  must 
make  a  complaint  to  the  common  council  of  his  city,  which 
may  be  induced,  unless  bribery  interferes,  to  pass  an 
ordinance  directed  to  relieve  the  condition.  If  the  or- 
dinance is  violated  the  aggrieved  taxpayer  may  start  pro- 
ceedings in  the  courts.  Most  ordinary  mortals,  however, 
have  neither  the  patience  nor  funds  with  which  to  litigate 
with  a  large  corporation,  so  they  bear  their  little  wrongs 
unremedied.  Under  state  regulation  a  postal  card  com- 
plaint will  start  the  wheels  of  investigation  and  the  order 
of  the  state  commission  has  all  the  legal  resources  of  the 
state  at  its  command  to  sustain  its  validity.  Thus  is  the 
poor  man  given  the  aid  of  the  state  in  remedying  conditions, 
which  otherwise  he  must  either  shoulder  or  bear  in  silence. 
Surely  such  a  system  of  helping  the  citizen  is  not  to  be 
challenged  as  undemocratic. 

State  regulation  encourages  municipal  ownership ;  en- 
forces proper,  uniform  accounts  and  reports ;  requires  rea- 
sonable standards  of  service  and  enforces  them  through 
constant  supervision ;  eliminates  abnormal  operating  ex- 
penses; supervises  the  entire  operations  of  the  utility  un- 
hampered by  local  boundaries,  and  fixes  rates  upon  facts 
that  recognize  justice  and  equality.  As  the  Supreme  Court 
of  Wisconsin  said  of  the  Public  Utility  Law:  "So  far 
it  has  been  found  to  accomplish  the  task  with  such  distin- 
guished completeness  that  the  enactment  stands  as  a  most 
consummate  effort  of  legislative  wisdom  and  a  model  for 
similar  efforts  elsewhere."1 

1  Calumet  Service  Co.  v.  Chilton,  148  Wisconsin  Keports,  334. 


CHAPTER  XXII 

DOES  REGULATION  RETARD  INVESTMENTS? 

Wisconsin  has  exploded  the  fallacy  of  the  statement 
that  state  regulation  stifles  business  enterprises.  There  has 
been  no  stagnation  of  business  under  Commission  control. 
The  period  of  state  regulation  has  been  one  of  wholesome 
prosperity,  except  possibly  for  electric  railways.  The 
record  of  financial  operations  of  corporations  regulated 
warrants  no  other  conclusion.  This  prosperity  has  been 
promoted  by  the  Commission  requiring  business  methods  of 
accounting;  by  wiping  out  rebates  and  discriminatory 
rates ;  by  abolishing  privilege  and  political  corruption ;  by 
enforcing  uniform  service  standards ;  by  basing  rates  on  the 
cost  of  service  rendered  and  by  rearing  all  upon  the  foun- 
dation of  physical  valuation  of  plant.  Within  the  period 
the  1,189  corporations  and  plants  were  subjected  to  about 
8,000  formal  and  informal  Commission  orders  directing  im- 
provements in  service  and  rate  adjustments  described  in 
previous  chapters.  These  may  have  checked  the  speculator, 
the  monopolist  or  the  promoter,  who  thrive  on  the  industry 
of  others.  They  have  encouraged  bona  fide  investors  who 
now  know  the  real  value  of  the  properties  back  of  the 
securities. 

In  spite  of  orders  decreasing  freight  rates  and  almost 
daily  exactions  for  improvements  in  service,  railroad  lines 
have  been  extended.  Bonds  have  been  floated  and  stock 
market  credits  have  been  maintained.  Although  the  greater 
part  of  the  state  was  checkered  with  lines  of  steam  rail- 

312 


REGULATION  AND  INVESTMENTS       313 

roads  before  the  regulation  law  was  enacted,  further  invest- 
ments have  been  made.  Since  1905  their  miles  of  track 
in  Wisconsin  have  been  extended  from  9,755  to  11,679. 
This  is  an  increase  of  12  per  cent  in  seven  years.1  If  gross 
earnings  be  considered  a  better  barometer,  even  here  the 
percentage  of  growth  in  Wisconsin  is  remarkable.  From 
$17,917,000  in  1905  gross  earnings  advanced  to  $68,262,000 
in  1912,  or  about  43  per  cent.  Contrast  this  with  the  16 
per  cent  increase  in  gross  earnings  in  Wisconsin  for  the  five 
years  from  1900  to  1905  preceding  regulation  and  the 
picture  is  more  convincing. 

Similar  ratios  do  not  pertain  as  to  all  phases  of  the 
electric  railway  industry.  A  glance  at  the  railroad  map 
of  Wisconsin  in  comparison  with  states  where  the  electric 
railway  development  has  been  more  rapid  suggests  the 
reasons.  State  regulation  is  scarcely  a  factor,  if  at  all. 
For  example,  Wisconsin  has  about  500  miles  of  interurban 
lines  as  compared  with  1,700  in  Indiana.  The  density  of 
population  in  the  Hoosier  State  is  79  per  cent  greater  per 
square  mile  than  in  Wisconsin.  Indiana,  with  an  area  of 
36,354  square  miles,  has  a  population  of  2,700,876,  or  74.3 
to  the  square  mile.  Wisconsin's  population  of  2,333,860 
over  a  56,066  square  mile  area  shows  a  density  of  only  41.6 
to  the  square  mile.  Moreover,  Indiana's  population  is 
more  largely  urban.  Each  state  has  one  large  city,  the 
natural  center  of  interurban  lines.  Excluding  Milwaukee 
and  Indianapolis  in  the  comparative  tables  of  the  two  states, 

1"In  1908  the  United  States  possessed  about  two-fifths  of  the 
mileage  of  the  world,  and  15  per  cent  more  than  all  of  Europe ;  she 
had  233,677,  as  compared  with  197,381  for  Europe,  and  595,841  for 
the  world.  The  American  railway  industry  has,  therefore,  become 
tremendously  large  .  .  .  the  greatest  of  all  industries.  Its  total 
capitalization  is  practically  $18,000,000,000,  probably  as  much  as 
one-eighth  of  all  the  wealth  of  all  the  people  of  the  United  States. 
It  has  in  its  employ  over  1,500,000,  largely  men,  to  whom  it  pays  in 
a  single  year  wages  amounting  to  above  a  billion  dollars. ' ' — Kaper, 
"Eailway  Transportation,"   186. 


314     RAILROADS  AND  PUBLIC  UTILITIES 

16.5  per  cent  of  Wisconsin's  population  is  in  cities  of  over 
8,000  inhabitants,  while  39.6  per  cent  of  Indiana's  is  in 
cities  of  the  same  class.  Small  villages,  the  natural  feeders 
of  interurban  lines,  are  more  frequent  along  the  routes  of 
Indiana's  systems.  In  Wisconsin  the  larger  cities  are 
separated  by  long  distances,  making  it  necessary  to  cover 
considerable  territory  before  reaching  cities  large  enough 
for  important  terminals.  Of  the  twenty-three  cities  in 
Wisconsin  with  a  population  of  8,000  or  over,  fourteen  are 
now  served  with  important  interurban  systems.  The  re- 
maining nine  are  in  general  too  isolated,  except  for  short 
line  developments.  Until  population  becomes  more  dense, 
interurban  development  in  Wisconsin  must  be  slow  because 
of  these  insurmountable  physical  difficulties.  Nevertheless 
in  Wisconsin  electric  railways  show  relative  progress  that 
is  encouraging. 

Between  1907  and  1913  the  total  miles  of  single  tracks 
of  street  and  interurban  lines  increased  12.51  per  cent ;  the 
number  of  car  miles  run,  23.8  per  cent ;  the  revenue  from 
passengers  carried,  37.19  per  cent,  and  the  plant  investment 
68.1  per  cent.  While  there  has  been  an  increase  in  gross 
revenues,  the  large  increases  in  operating  expenses,  notice- 
able on  all  systems  in  the  United  States  within  the  same 
period,  has  had  its  effect  upon  the  gross  revenues.  That 
population  is  the  controlling  factor  in  rapid  electric  rail- 
way development  is  shown  from  the  reports  of  net  earnings 
made  in  Wisconsin  cities  and  in  localities  where  population 
is  dense. 

Public  utilities  operating  necessarily  within  limited 
areas  have  made  great  developments  within  the  period. 
Their  reports  furnish  incontrovertible  proofs  that  regula- 
tion, instead  of  driving  capital  out,  attracts  it.  The  elec- 
tric light,  gas,  telephone  and  water  companies  have  exceeded 
the  steam  railroads  in  the  ratio  in  which  they  have  made 
cash  investments  for  new  construction. 


REGULATION  AND  INVESTMENTS       315 

Since  1907,  the  year  that  the  Wisconsin  Public  Utility 
Law  became  effective,  the  gross  earnings  of  electric  plants 
increased  from  $3,147,000  in  1907  to  $6,124,000  in  1912, 
or  94.6  per  cent.  Nor  is  that  all.  Plant  values  for  the 
same  period  reported  by  these  companies  jumped  from 
$19,537,000  to  $41,747,000  or  113  per  cent. 

Telephone  companies  had  gross  earnings  of  $3,074,000 
in  1907,  which  reached  the  total  of  $5,011,000  in  1912,  an 
increase  of  63  per  cent.  Meantime  the  plant  investments 
of  these  same  concerns  showed  an  increase  from  $12,996,000 
to  $18,309,000  or  40.9  per  cent. 

Confined  to  limited  areas  of  development  and  suffering 
from  the  competition  of  electric  enterprises,  even  gas  plants 
have  been  able  to  show  a  substantial  increase  in  the  past 
five  years.  During  the  period  their  gross  earnings  in- 
creased from  $3,539,000  to  $4,363,000  or  23  per  cent. 

Plants  supplying  water  have  grown  in  gross  earnings 
from  $1,906,000  to  $2,689,000  or  41  per  cent  during  the 
five-year  period,  while  the  increase  in  plant  values  has  been 
from  $21,090,000  to  $24,390,000  or  15.6  per  cent. 

As  already  indicated,  the  result  has  been  that  legitimate 
business  investments  have  been  developed  and  directed 
along  lines  of  efficiency  and  business  honesty.  It  is  this 
policy  of  justice  that  is  encouraging  development.  With 
physical  valuations  and  definite  data  of  plant  operations, 
bonding  houses  are  now  offering  the  securities  of  public 
utilities  that  before  passed  notice.  C.  E.  Salmon  of  Beloit, 
a  public  utility  manager,  recently  declared  that  state  regu- 
lation has  reduced  interest  rates  at  which  money  for  im- 
provements could  be  secured,  1  per  cent. 

"We  have  seen  the  public  utility  bond,  with  great 
opposition,  fight  for  a  market,  for  a  price  and  for  ready 
absorption,"  said  the  manager  of  the  bond  department  of 
Marshall  and  Usley  bank,  Milwaukee,  in  a  recent  address. 
' '  We  have  come  to  realize  that  to-day  it  is  perhaps  the  most 


316     RAILROADS  AND  PUBLIC  UTILITIES 

attractive  form  of  bond  investment,  having  behind  it  the 
ample  security  of  a  property  rendering  an  essential  service 
in  a  growing  community,  and  yielding  to  the  investor  the 
most  attractive  interest  return  consistent  with  conservative 
security  upon  the  market.  The  period  of  greatest  develop- 
ment in  the  flotation  of  public  securities  has  been  the  past 
six  or  seven  years;  the  greatest  incentive  thereto  has  been 
the  enactment  of  sound  public  utility  regulation  laws. 
Bonds  based  upon  earning  power,  though  reasonably  safe, 
can  never  equal  in  security  those  whose  desirability  is  based 
primarily  upon  the  basis  of  physical  valuation,  plus  earn- 
ing power.  A  great  body  of  principles,  sound  in  funda- 
mental conception,  is  embodied  within  the  Wisconsin  Pub- 
lic Utility  act.  It  has  meant  much  to  the  state.  It  will 
mean  more  as  time  goes  by." 


CHAPTER  XXIII 

COMMISSION    AND    THE    COURTS 

The  original  Interstate  Commerce  Law  was  greatly 
modified  in  intent  and  many  of  its  underlying  principles 
either  weakened  or  destroyed  through  decisions  of  the 
federal  courts.1  In  Wisconsin  there  has  been  no  judicial 
interpretation  or  construction  of  the  provisions  of  the 
regulating  act,  which  in  any  way  had  the  effect  of  diminish- 
ing the  primary  purposes  of  the  law.  The  difference  in 
the  spirit  with  which  the  state  and  federal  courts  view 
economic  conditions  probably  explains  the  divergent  re- 
sults. Gradually  the  Wisconsin  Supreme  Court  has  aban- 
doned the  customary  practice  of  shackling  twentieth  cen- 
tury progress  with  eighteenth  century  ideals.  Its  tempera- 
ment has  been  thus  expressed  in  an  opinion 2  by  Chief 
Justice  J.  B.  Winslow:  "When  an  eighteenth  century 
constitution  forms  the  charter  of  liberty  for  a  twentieth 
century  government,  must  the  general  provisions  be  con- 
strued and  interpreted  by  an  eighteenth  century  mind,  sur- 
rounded by  eighteenth  century  conditions  and  ideals? 
Clearly  not.  This  were  to  command  the  race  to  halt  in 
its  progress,  to  stretch  the  state  upon  a  veritable  bed  of 
Procrustes. ' ' 

The  tendencies  of  the  decisions  of  the  Wisconsin  Su- 
preme Court  relating  to  regulatory  measures  have  given 

1Roe,  "Our  Judicial  Oligarchy,"  38-41;  Meyer,  "Railway  Legis- 
lation in  the  United  States,"  224-242. 

2  Borgnis  v.  Folk,  147  Wisconsin  Reports,  349. 

317 


318     RAILROADS  AND  PUBLIC  UTILITIES 

vitality  to  the  principles  involved.  This  is  apparent  from 
the  general  result  of  the  litigation  that  has  arisen  out  of 
the  various  acts  administered  by  the  Commission.  Out 
of  2,511  formal  orders  of  the  Commission,  fifty  appeals 
to  the  courts  have  been  taken,  but  in  only  about  thirty 
were  the  appeals  perfected.  The  others  were  abandoned. 
In  two  cases  the  Commission  was  reversed  on  a  technicality 
and  in  two  others  the  issues  were  framed  in  amicable  suits 
brought  for  the  purpose  of  securing  a  judicial  interpreta- 
tion of  certain  doubtful  phraseology  contained  in  sections 
of  the  statute.  In  both  of  these  amicable  suits  the  orders 
of  the  Commission  were  overruled.  Six  cases  are  now 
pending  in  the  state  and  federal  courts,  all  other  contested 
orders  having  been  sustained.  Through  collateral  suits 
brought  by  railroads,  some  of  which  are  still  pending,  in 
which  the  Commission  or  its  orders  were  not  directly 
affected,  an  even  broader  interpretation  of  the  scope  of  the 
law  has  been  secured  than  through  direct  appeals. 

The  cases  considered  by  the  courts  naturally  fall  into 
two  groups  and  will  be  considered  accordingly:  (1)  rail- 
roads, (2)  other  utilities.  Each  of  these  groups  will  be 
subdivided.  In  connection  with  the  original  act  creating 
the  Commission  and  conferring  upon  it  power  to  supervise 
common  carriers  as  defined  in  the  act,  a  number  of  col- 
lateral laws,  some  in  existence  at  the  time  of  the  creation 
of  the  Commission,  and  some  subsequently  enacted,  were 
considered  by  the  courts.  Had  any  of  these  collateral  acts 
been  seriously  weakened  by  the  courts,  the  scope  of  the 
entire  scheme  of  regulation  might  have  been  greatly  cur- 
tailed and  its  efficiency  impaired.  But  the  foresight  and 
judgment  of  the  court  in  interpreting  these  various  laws 
regulating  large  public  interests  is  well  illustrated  by  the 
determination  of  the  questions  which  came  before  it,  such 
as,  (a)  what  powers  may  be  delegated  to  a  Commission; 
(b)  the  scope  of  evidence  that  may  be  considered  by  such 


COMMISSION  AND  THE  COURTS  319 

a  quasi- judicial  body;  (c)  the  adequacy  of  transportation 
service  to  the  public;  (d)  the  enforcement  of  just  rates; 
(e)  the  safety  of  railroad  crossings,  and  (f)  the  control 
of  capitalization. 

COUET    CASES    AFFECTING    EAILEOAD    EEGULATION 

Within  a  year  after  the  Railroad  Commission  Law 
became  effective,  the  constitutionality  of  the  act  was  at- 
tacked in  the  courts.  The  question  arose  over  an  order 
of  the  Commission  made  September  15,  1906,  directing  the 
Minneapolis,  St.  Paul  &  Sault  Ste.  Marie  Railway  Com- 
pany to  erect  a  platform  at  Dwight,  for  loading  and  un- 
loading freight  and  express  and  for  receiving  and  dis- 
charging passengers,  and  requiring  two  trains  to  stop  daily. 
The  new  station  would  furnish  service  to  about  sixty-four 
families.  The  law  was  challenged  as  an  unlawful  delega- 
tion of  legislative  powers  and  many  sections  of  the  act  were 
subjected  to  review.  Before  the  supreme  court  had  finally 
determined  the  litigation,  it  invited  all  the  railroads  of  the 
state  to  file  briefs  and  participate  in  the  arguments  before 
the  court.  The  leading  railroads  of  the  state  accepted 
the  invitation.  The  decision  of  the  court,  as  pronounced 
through  Justice  Timlin,  had  a  salutary  effect  in  checking 
appeals  to  the  court.  This  was  due  to  the  broad  interpreta- 
tion placed  upon  the  act,  giving  the  findings  of  the  Com- 
mission as  much  weight  as  the  findings  of  a  jury  and 
greater  weight  than  those  of  a  court  in  a  chancery  suit. 

After  reviewing  the  history  of  the  legislation  in  the 
state  for  the  creation  of  the  Commission  and  pointing  out 
the  impossibility  of  railroad  rate  and  service  regulation  by 
direct  action  of  the  legislature,  the  court  held  that  "the 
legislature  may  create  1  a  quasi-judicial  tribunal  and  dele- 

1  M.  St.  P.  $•  S.  S.  M.  E.  Co.  v.  Bailroad  Commission  of  Wiscon- 
sin, 136  Wis.  Eeports,  146;   116  N.  W.  Eep.,  905. 


320     RAILROADS  AND  PUBLIC  UTILITIES 

gate  to  that  tribunal  the  power  which  the  legislature 
possesses  to  ascertain,  determine  and  declare  facts;"  that 
a  general  rule  of  law  may  be  enacted  to  take  effect  upon 
the  establishment  of  certain  facts  and  conditions,  and  that 
"statutes  declaring  that  railroad  rates  and  service  shall 
be  reasonable,  and  creating  a  commission  with  power  to 
investigate  existing  rates  and  service,  and  to  fix  and 
determine  what  rates  and  what  service  are  reasonable,  the 
statute  then  providing  that  the  rates  and  service  so  fixed 
shall  be  in  force,  have  been  generally  upheld  as  a  valid 
exercise  of  legislative  power." 

Upon  the  question  that  under  the  law  the  Commission 
in  establishing  a  rate  merely  established  the  maximum 
charge  that  could  be  exacted,  which  was  urged  and  received 
the  approbation  of  one  of  the  dissenting  judges,  the  major- 
ity opinion  says : 

The  law  intends  that  there  is  only  one  rate,  charge  or  service 
that  is  reasonable  and  just.  The  order  of  the  Commission  is 
prima  facie  evidence  that  the  rates,  charge,  or  service  found  and 
fixed  by  it  is  the  particular  rate,  charge,  or  service  declared  by 
the  legislature  in  general  terms  to  be  lawful  and  to  be  in  force. 
If  it  were  conceded  that  the  Commission  had  power  or  discretion 
to  fix  one  of  several  rates,  either  of  which  would  be  just  and 
reasonable,  it  would  be  hard  to  say  that  this  was  not  a  delegation 
of  pure  legislative  power  to  the  Commission. 

Equally  important  was  the  declaration  in  the  opinion 
that  the  power  of  the  court  to  review  the  orders  of  the 
Commission,  and  to  send  them  back  to  the  Commission 
for  further  investigation  if  found  unreasonable,  is  not  an 
unlawful  delegation  of  legislative  powers  to  the  court.  The 
provision  of  the  law  stating  that  before  any  order  of  the 
Commission  can  be  set  aside  the  plaintiff  must  show  by 
"clear  and  satisfactory"  evidence  that  the  order  is  unlaw- 
ful and  unreasonable  is  intended   to  describe   a  greater 


COMMISSION  AND  THE  COURTS  321 

degree  of  proof  than  preponderance  of  evidence  and  that 
"great  weight  will  be  given  an  order  of  the  Commission 
and  a  very  strong  case  must  be  made  to  establish  its  un- 
reasonableness. ' ' 

Like  the  United  States  Supreme  Court,  we  accord  to  the  or- 
ders of  the  Railroad  Commission  the  weight  due  to  the  decisions 
of  a  tribunal  authorized  by  law  and  informed  by  experience.1 
But  we  go  further  than  this,  and  add  the  requirement  of  that 
particular  degree  of  proof  specified  in  the  statute,  and  we  con- 
sider the  subject  matter  and  scope  of  the  judicial  investigation 
above  referred  to.  We  thus  leave  upon  the  Railroad  Commission 
the  great  responsibility  which  we  believe  the  legislature  intended 
to  impose. 

In  establishing  the  policy  of  the  Commission  the  court 
further  said: 

In  determining  whether  or  not  the  order  of  the  Commission 
is  unreasonable,  it  must  also  be  considered  that  every  unnecessary 
burden  imposed  upon  the  railroad  impairs  the  net  receipts  and 
diminishes  that  margin,  if  there  be  one,  between  the  amount  suf- 
ficient to  assure  a  fair  return  on  the  value  of  its  property,  plus 
the  amount  of  its  fixed  charges  and  operating  expenses,  and  its 
gross  receipts.  In  this  margin  the  public  and  the  railroad  are 
interested,  because  it  is  only  when  this  exists  that  betterments  in 
construction  or  improvements  in  service  not  imperative  or  indis- 
pensable, or  reduction  in  rates,  will  ordinarily  be  voluntarily 
made  by  the  railroad  or  can  ordinarily  be  ordered  or  enforced 
by  the  Commission.  We  are  not  now  speaking  of  those  extreme 
cases  where  the  public  duty  must  be  discharged  whatever  the 
financial  consequences  to  the  railroad.  But  in  ordinary  cases  to 
waste  this  margin  is  to  waste  the  fund  in  which  the  whole  public 
is  interested.  This  should  never  be  done  for  the  benefit  of  the  few 
as  against  the  interests  of  many.  It  is  also  to  be  considered  that 
this  margin  ought  not  ordinarily  to  be  exhausted  or  swept  away 

1  III.  Cent.  E.  E.  Co.  v.  Interstate  Commerce  Commission,  206  U. 
S.  441,  27  Sup.  Ct.  700. 


322      RAILROADS  AND  PUBLIC  UTILITIES 

by  orders  or  requirements  of  the  Railroad  Commission  as  fast 
as  accumulated,  because  human  nature  or  railroad  nature  is  such 
that  no  one  will  long  economize  on  operating  or  other  expenses 
if  his  economy  only  furnishes  a  larger  basis  for  further  exac- 
tions. 

Thus  it  was  settled  by  the  court  that  unless  an  order  of 
the  Commission  be  unlawful  or  unreasonable  it  cannot  be 
disturbed.  While  the  court  declared  that  had  it  been  sit- 
ting as  the  Commission  it  would  not  have  made  the  order, 
yet  the  same  being  one  over  which  men  might  reasonably 
differ,  it  must  be  sustained. 

The  court  admonished  the  public  and  the  carriers  to  be 
patient  with  the  necessarily  slow  and  laborious  process  in 
working  out  a  system  of  precedents. 

The  notion  that  commissions  of  this  kind  should  be  closely 
restricted  by  the  courts  and  that  justice  in  our  day  can  be  had 
only  in  courts  is  not  conducive  to  the  best  results.  Justice  dwells 
with  us  as  with  the  fathers.  It  is  not  exclusively  the  attribute  of 
any  office  or  class,  it  responds  more  readily  to  confidence  than 
to  criticism,  and  there  is  no  reason  why  the  members  of  the  great 
Railroad  Commission  of  this  state  should  not  develop  and  estab- 
lish a  system  of  rules  and  precedents  as  wise  and  beneficent 
within  their  sphere  of  action  as  those  established  by  the  early 
common-law  judges.  We  find  the  statute  well  framed  to  bring 
this  about. 

Upon  the  question  of  the  character  of  the  evidence 
that  might  be  considered  by  the  Commission  in  arriving 
at  a  conclusion,  the  court  has  made  several  interesting 
rulings.  Thus  in  the  Appleton  Water  Works  case  1  it  was 
held  that  the  expert  judgment  of  the  Commission  might  be 

1  Appleton  Water  Works  Co.  v.  Railroad  Commission  of  Wiscon- 
sin, 142  N.  W.  Rep.,  476;  154  Wisconsin  Reports,  121.  This  case  ia 
analyzed  in  greater  detail  as  to  the  court's  ruling  in  the  discussion 
of  "Valuation,"  Ch.  III. 


COMMISSION  AND  THE  COURTS  323 

exercised  in  determining  elements  in  fixing  a  just  compensa- 
tion that  a  municipality  is  obliged  to  pay  to  a  company 
whose  property  it  seeks  to  acquire  under  the  provisions 
of  the  law.  Another  phase  of  this  question  is  also  pre- 
sented in  the  case  of  the  Wisconsin  Lakes  Ice  &  Cartage 
Company.  In  this  case  the  Commission  reduced  the  rates 
for  shipments  of  ice  and  the  carrier  claimed  there  was 
not  sufficient  evidence  in  the  record  to  modify  the  existing 
rate.  It  was  held,  however,  that  the  Commission,  because  x 
of  its  administrative  nature  and  expert  knowledge,  might 
apply  that  knowledge  in  the  determination  of  reasonable 
rates  without  the  formality  of  trial  or  hearing  or  the  formal 
taking  of  evidence,  and  that  "great  latitude  should  be 
allowed  in  the  admission  of  evidence  and  a  comparison  with 
other  rates  is  admissible."  The  opinion  holds  that  the 
Commission  may  take  judicial  notice  of  all  reports  of  rail- 
roads to  the  Commission  and  that  it  might  consider  the 
information  contained  in  such  reports  without  the  same 
being  introduced  in  evidence  upon  the  hearing. 

Service  requirements  of  the  legislature  or  the  Commis- 
sion imposed  upon  the  railroads  have  also  been  generally 
upheld.  A  law  requiring  the  upper  berth  in  a  sleeping  car 
to  be  kept  closed  until  engaged  or  occupied,  when  the  lower 
berth  is  being  used,  being  limited  to  intrastate  traffic,  "is 
not 2  an  interference  with  interstate  commerce  carried  on 
in  cars  doing  both  intrastate  and  interstate  business,  there 
being  no  specific  regulation  touching  the  matter  in  conflict 
therewith,  so  that  it  can  do  no  more  than  incidentally 
affect  the  interstate  commerce  so  carried  on. ' ' 

The  Dwight  service  order,  cited  above,  has  been  followed 


1  C.  $•  N.  W.  B.  Co.  v.  Railroad  Commission  of  Wisconsin,  145  N. 
W.  Eep.,  216;  Concurring  opinion  by  Chief  Justice  Winslow,  Ibid., 
974. 

2  State  v.  C.  M.  <f  St.  P.  B.  Co.,  140  N.  W.  Eep.,  70;  also  see  State 
v.  Bodman,  134  Wisconsin  Reports,  89;  114  N.  W.  Rep.,  137. 


324     RAILROADS  AND  PUBLIC  UTILITIES 

by  court  rulings  in  other  service  cases  that  broaden  the 
interpretation  with  regard  to  passenger-train  service  to  be 
furnished  to  smaller  communities.  The  minimum  of  rea- 
sonable railroad  service  to  be  furnished  to  villages  with  a 
post  office  and  having  two  hundred  or  more  inhabitants 
has  been  prescribed  by  the  legislature.  This  law  provides 
that  every  railroad  corporation  operating  within  the  state 
shall  maintain  a  station  at  every  village  of  two  hundred 
inhabitants  within  one-eighth  of  a  mile  or  more  of  its  line. 
It  shall  stop  one  passenger  train  each  way  at  such  station 
daily,  if  trains  are  run  on  the  road  to  that  extent.  If  four 
or  more  passenger  trains  are  run  each  way  daily,  at  least 
two  passenger  trains  each  way  must  be  stopped.  Follow- 
ing these  statutory  provisions  the  Commission  ordered  the 
Chicago,  Burlington  &  Quincy  Railway  Company  to  stop 
two  of  its  passenger  trains  each  way  daily  at  Cochrane, 
a  village  of  about  two  hundred  and  sixty  inhabitants.  In 
its  order  the  Commission  said  that  it  believed  the  village 
already  hac_  adequate  service,  but  that  the  law  made  the 
ordering  of  this  additional  service  compulsory.  The  trains 
to  be  stopped  would  be  interstate  trains,  unless  the  com- 
pany put  on  additional  local  trains. 

The  review  of  the  order  by  the  state  supreme  court 
broke  new  ground  in  the  conclusions  promulgated.  First, 
the  court  held  1  that  an  accommodation  freight  train  could 
not  be  counted  as  passenger-train  service  within  the  law, 
and  second,  that  the  act  not  only  applied  to  intrastate 
but  also  to  interstate  trains.  Justice  Vinje,  in  the  ma- 
jority opinion  of  the  court,  said:  "That  a  state  regula- 
tion may  indirectly  or  in  a  slight  degree  affect  or  in- 
terfere with  interstate  commerce  does  not  render  it  void, 
if  that  is  not  its  purpose   and  if  it  has  another  legiti- 

XC.  B.  tf-  Q.  B.  Co.  v.  Railroad  Commission  of  Wisconsin,  140  N. 
W.  Kep.,  296.  This  case  is  now  pending  in  the  federal  Supreme 
Court  on  appeal. 


COMMISSION  AND  THE  COURTS  325 

mate  object."  It  was  also  claimed  by  the  railroad  that 
if  an  extra  local  train  were  put  on  to  fulfill  the  service 
requirement  without  stopping  interstate  trains,  the  revenue 
would  not  equal  the  expense.  To  this  the  court  replied : 
"It  is  not  shown,  however,  that  the  whole  passenger  revenue 
of  the  road  in  this  state  is  not  ample  to  meet  the  additional 
expense,  with  a  fair  margin  of  profit.  But  even  if  that 
were  not  so,  it  is  no  answer  to  say  that  it  would  have  to  be 
performed  at  a  financial  loss." 

Still  another  question  of  freight  service,  in  which  this 
provision  of  the  statute  was  involved,  was  raised  in  different 
form  in  a  still  later  case.  The  Commission  found  that 
adequate  service  required  the  establishment  of  a  new  milk 
station  (Omdall's)  in  the  heart  of  a  dairying  country, 
where  twenty-three  farmers  might  bring  from  80  to  100 
cans  of  milk  and  cream  daily  for  shipment.  Certain  pas- 
senger trains  were  ordered  to  be  stopped  to  take  on  these 
consignments.  The  railroad  objected  and  took  the  matter 
into  court.  It  claimed  that  the  right  to  fix  minimum 
service  had  been  taken  away  from  the  Commission  by 
statute.  But  the  supreme  court  held  x  that  the  statute 
requiring  certain  passenger  trains  to  stop  at  villages  of 
two  hundred  or  more  inhabitants  did  not  interfere  with 
the  power  of  the  Railroad  Commission  to  establish  a  milk 
station  and  require  passenger  trains  to  stop  there.  The 
court  was  unanimous  in  finding  this  a  reasonable  service 
requirement. 

From  the  service  that  a  railroad  must  furnish  a  com- 
munity we  turn  to  service  requirements  that  a  manufactur- 
ing plant  off  the  line  of  road  may  demand.  The  right  of 
the  Commission  to  order  a  railroad  to  operate  its  line  by 
spur  track  within  three  miles  of  the  main  road  to  a  manu- 
facturing plant,   under   a  law  passed   in   1909,   if  in   the 

1  ft  M.  4"  St.  P.  B.  Co.  v.  Railroad  Commission  of  Wisconsin,  146 
N.  W.  Rep.,  1129. 


326     RAILROADS  AND  PUBLIC  UTILITIES 

judgment  of  the  Commission  public  convenience  demands 
it,  has  been  held  by  the  court  to  be  a  valid  enactment.  In 
the  only  contested  litigation  on  this  subject  the  court  held 
that  this  power  in  the  Commission  was  not  an  exercise 
of  legislative  functions,  and  it  might  lawfully  be  delegated 
to  a  quasi- judicial  tribunal.  In  the  instant  case  the  owners 
of  land  to  be  crossed  by  the  spur  track  contended  that  the 
power  to  condemn  land  upon  which  to  build  a  track  con- 
travened the  state  and  federal  constitutions,  which  prohibit 
the  taking  of  land  for  private  use.  The  court  held  that 
the  track  when  built,  regardless  of  who  pays  for  its  con- 
struction, becomes  a  part  of  the  trackage  of  the  railroad 
system,  and  hence  devoted  to  a  public  service.1  The  federal 
court  in  an  opinion  by  Justice  Hughes  affirmed  this  view. 

The  separation  of  grade  crossings  of  highways  and 
railroad  tracks  and  the  protection  by  safety  devices  of 
grade  crossings  that  cannot  be  separated  have  been  numer- 
ous. In  1909  a  statute  was  enacted  authorizing  the  Com- 
mission to  change  the  grade  of  such  crossings  wherever 
public  safety  required  it,  and  to  apportion  the  expense 
between  the  railroad  and  the  municipalities.2  In  one  of 
the  cases  which  reached  the  supreme  court  the  Commission 
required  a  town  to  pay  10  per  cent  of  the  cost  of  a  viaduct 
over  two  railroads  which  crossed  the  highway  in  close 
proximity  to  each  other.  The  town  contested  the  order 
in  an  attempt  to  shift  the  entire  burden  onto  the  railroads. 

In  affirming  the  Commission's  order,  the  court  through 

1C.  $•  N.  W.  R.  Co.  (Eden  Independent  Lime  &  Stone  Company, 
intervener)  v.  Union  Lime  Co.,  140  N.  W.  Rep.,  346;  also  see  Union 
Lime  Co.  et  al.  v.  Railroad  Commission  of  Wisconsin  et  al.,  144  Wis- 
consin Reports,  523 ;  129  N.  W.  Rep.,  605. 

2  In  the  case  of  the  City  of  Superior  v.  Roemer  et  al.,  141  N.  W. 
Rep.,  250,  the  court  held  that  where  a  municipal  ordinance  had  been 
passed  before  the  law  became  effective  and  was  served  upon  a  rail- 
road compelling  it  to  pay  the  entire  expense  of  a  crossing,  the  legis- 
lative enactment  did  not  apply. 


COMMISSION  AND  THE  COURTS  327 

Justice  Barnes  said : x  "  The  statute  under  consideration 
does  not  conflict  with  any  constitutional  provision.  Indeed, 
no  claim  is  made  that  it  does.  The  legislature  in  the  exer- 
cise of  its  police  power  has  a  perfect  right  to  enact  the  law. 
The  frequency  of  accidents  at  grade  crossings  is  notorious 
and  the  number  of  victims  is  appalling.  The  aim  of  the 
legislature  is  to  lessen  the  number  of  these  casualties.  We 
believe  that  no  court  has  held  that  the  legislative  power 
here  exercised  did  not  exist.  It  was  neither  inequitable  nor 
illegal  to  require  the  owners  of  the  three  public  highways 
involved  to  contribute  to  the  expenses  of  the  overhead 
crossing. ' ' 

Closely  akin  to  the  power  imposed  in  the  section  of  the 
law  contested  in  the  above  case  was  another  which  gave  the 
Commission  power  under  the  certificate  of  public  conven- 
ience and  necessity  law  to  determine  the  place  and  manner 
of  crossing  of  different  railroads.2  The  law  has  been  sus- 
tained by  the  supreme  court.  This  law  applies  more  par- 
ticularly to  a  proposed  railroad  crossing  the  tracks  of  an 
existing  system.  Under  the  decision  the  expense  of  making 
the  crossing  is  placed  upon  the  junior  road. 

The  "reparation"  laws  have  also  been  before  the  su- 
preme court  for  construction.  Under  these  laws,  if  a  ship- 
per believes  that  an  excessive  rate  has  been  charged  on  a 
consignment,  he  may  bring  proceedings  before  the  Commis- 
sion. If  his  complaint  is  sustained,  the  Commission  orders 
a  refund  against  the  railroad  company  for  the  amount  of 
the  excess  charges.  The  court  decision  affecting  this 
statute  3  held  that  the  provision  requiring  as  a  condition 
precedent  to  the  recovery  that  the  action  be  brought  before 

1  Town  of  Polk  v.  Railroad  Commission  of  Wisconsin,  143  Wis- 
consin Keports,  191. 

-  State  ex  rel.  Northern  Pacific  R.  Co.  v.  Railroad  Commission  of 
Wisconsin,  121  N.  W.  Eep.,  919;  140  Wisconsin  Keports,  145. 

3  Frank  A.  Graham  Ice  Co.  v.  C.  M.  #  St.  P.  R.  Co.,  140  N.  W. 
Eep.,  1097. 


328     RAILROADS  AND  PUBLIC  UTILITIES 

the  Railroad  Commission,  instead  of  in  the  courts,  did  not 
deny  the  right  of  trial  by  jury  guaranteed  by  the  state 
and  federal  constitutions.  Justice  Kerwin  in  the  opinion 
of  the  court  said  that,  ' '  the  legislature  has  the  right  within 
constitutional  bounds  to  fix  rates,  and  a  remedy  by  action 
against  the  Railroad  Commission  is  preserved  in  favor  of 
any  aggrieved  party,  so  the  rights  of  all  parties  are  well 
guarded  under  the  law. ' '  As  the  cost  of  proceeding  before 
the  Railroad  Commission  is  but  a  fraction  of  the  cost  of 
court  litigation,  this  decision  has  been  considered  a  victory 
for  the  people. 

The  capitalization  of  railroads  is  generally  regarded  as 
connected  with  the  supervision  of  rates  and  service.1  Pre- 
vious chapters  have  shown  the  evils  of  burdening  the  public 
with  excessive  capitalizations.  The  legislature  of  1907 
clothed  the  Commission  with  the  power  to  regulate  the 
issuance  of  the  securities  of  all  public  service  corporations. 
The  validity  of  the  act  was  tested  in  the  courts.  Unfor- 
tunately but  a  single  phase  of  the  purpose  of  the  act  was 
involved  in  the  case,  and  in  passing  upon  this  the  court 
limited  the  authority  of  the  Commission  to  the  mere  matter 
of  determining  the  competency  of  the  corporation  to  issue 
the  proposed  securities.2  Previous  to  this  decision  the  Com- 
mission had  assumed  the  power  to  investigate  the  financial 
history  of  the  corporation  from  its  inception,  and  although 
not  possessing  power  to  refuse  the  authorization  of  the 
securities  desired,  if  the  same  should  be  determined  to  be 
legal,  it  nevertheless  reported  upon  the  entire  history  of 
the  corporation  in  connection  with  the  grant  of  authority 
to  issue  the  securities.  In  view  of  the  decision  of  the  court 
curtailing  the  power  of  the  Commission,  the  legislature  of 

1Dunn,  "The  American  Transportation  Question,"  Preface,  v; 
also  see  Ch.  XVI  supra. 

2  State  ex  rel.  H.  St.  P.  4"  S.  S.  M.  B.  Co.  v.  Railroad  Commis- 
sion of  Wisconsin,  137  Wis.  Reports,  80;   117  N.  W.  Rep.,  846. 


COMMISSION  AND  THE  COURTS  329 

1909  passed  the  present  stock  and  bond  law,  which  is  prob- 
ably the  most  stringent  law  in  effect  anywhere  and  has 
been  the  basis  of  all  legislation  on  the  subject  in  other 
states  since  its  enactment.  It  is  still  an  open  question 
whether  this  law  is  really  the  solution  of  the  problem  of 
the  proper  regulation  of  public  service  corporation  se- 
curities. 

COURT  DECISIONS  TOUCHING  UTILITIES 
OTHER  THAN  RAILROADS 

Besides  the  decisions  heretofore  referred  to,  relating 
exclusively  to  railroads,  the  supreme  court  has  rendered  a 
number  of  decisions  of  general  importance  on  the  subject 
of  the  regulation  of  public  utilities.  The  leading  questions 
that  have  been  considered  involve  (a)  the  effect  of  the 
Public  Utility  Law  and  the  Railroad  Commission  Law  on 
franchises;  (b)  the  validity  of  contracts  to  furnish  free 
service  made  by  cities  with  utilities  before  the  enactment 
of  the  law ;  (c)  the  reasonableness  of  rates  and  the  division 
of  territory  between  competing  telephone  companies;  (d) 
service  rules  and  requirements,  including  a  definition  of 
the  term  "public"  as  used  in  the  Public  Utility  Law. 

Naturally  a  law  involving  franchises,  which  is  revolu- 
tionary in  its  character,  gave  rise  to  many  complicated 
legal  questions.  The  indeterminate  permit  provided  by  the 
statute  as  a  substitute  for  existing  and  future  franchises 
was  a  novel  experiment.  The  disorder  that  existed  at  the 
time  over  the  variety  of  franchises  that  had  been  granted  is 
well  illustrated  in  a  recent  case,  when  the  court  had  this 
feature  of  the  law  under  consideration.  Justice  Marshall 
said: 

The  confusion  created  during  the  years  preceding  the  Public 
Utility  Law  of  1907  x  by  granting  franchises  in  several  different 

1  La  Crosse  v.  La  Crosse  Gas  <$r  Electric  Co.,  145  Wisconsin  Re- 
ports, 420. 


330     RAILROADS  AND  PUBLIC  UTILITIES 

ways — some  directly  by  the  state,  some  by  cities  as  state  agencies, 
some  by  the  state  in  the  main  but  with  power  to  the  various  muni- 
cipalities as  state  agencies  to  add  supplementary  features,  fitting 
particular  situations,  some  by  the  state  without  regard  to  local 
police  regulations,  and  some  likewise  having  such  regard,  either 
expressly  or  by  necessary  implication,  some  having  contractual 
features  creating  doubt  in  regard  to  their  constitutional  status, 
and  some  having  such  features  but  without  doubtful  character, 
many  of  such  matters  being,  in  the  ultimate,  more  or  less  detri- 
mental to  consumers,  whether  public  or  private,  and  propri- 
etors as  well — on  the  whole  created  a  perplexing  situation  in  re- 
spect to  harmonious  administration.  The  legislature  sought  to 
deal  efficiently  with  this  mixed  situation,  the  growth  of  years. 

The  right  of  an  interurban  railway  company  volun- 
tarily to  increase  rates  of  fare,  regardless  of  franchise  pro- 
visions, was  considered  by  the  court  in  the  case  of  the  City 
of  Manitowoc  v.  Manitowoc  &  Northern  Traction  Com- 
pany} The  city  had  granted  the  use  of  its  streets  to  the 
interurban  line  specifying  as  one  of  its  conditions  that 
the  rate  of  fare  for  carrying  passengers  between  Manitowoc 
and  Two  Rivers  should  not  exceed  ten  cents  for  a  single 
trip,  during  the  life  of  a  thirty-five-year  franchise.  This 
was  prior  to  the  enactment  of  the  law  conferring  jurisdic- 
tion upon  the  Commission  over  rates  and  services  of 
steam  railroads,  interurban  electric  railroads  and  street 
railways.  Several  years  after  the  law  had  been  in  force, 
the  traction  company  announced  its  intention  to  increase 
the  rate  of  fare  between  the  points  mentioned  to  fifteen 
cents.  The  city  began  an  action  to  compel  the  company  to 
abide  by  its  contract. 

The  court  held  that  in  granting  franchises  a  municipal- 
ity acts  as  the  agent  of  the  state;  that  the  governmental 
power  to  fix  rates  was  not  surrendered  to  the  municipality, 

1  City  of  Manitowoc  v.  Manitowoc  $•  Northern  Traction  Co.,  145 
Wisconsin  Keports,  13;  129  N.  W.  Rep.,  925. 


COMMISSION  AND  THE  COURTS  331 

and  that  where  no  such  specific  authority  had  been 
granted,  the  contract  would  remain  valid  between  the 
parties  until  the  state  exercised  its  paramount  right  to  fix 
rates.    In  the  opinion  of  the  court  Justice  Barnes  said : 

It  is  contended  that  this  law  (Railroad  Commission  Law)  has 
superseded  the  contract  involved  in  this  suit  and  that  therefore 
the  contract  no  longer  has  any  binding  force  or  affect.  We  do 
not  think  so.  The  statute  worked  no  change  in  existing  rates. 
It  simply  provided  that  all  rates  should  be  reasonable,  and  left 
to  the  Railroad  Commission  the  power  to  determine  the  fact  as 
to  whether  or  not  a  given  rate  was  reasonable.  When  the  deter- 
mination was  reached  the  law  became  operative  upon  the  par- 
ticular rate  called  in  question  and  the  rate  arrived  at  then  became 
the  lawful  rate  and  continued  so  until  set  aside  in  the  manner  pro- 
vided in  the  law.  The  Railroad  Commission  has  made  no  deter- 
mination in  the  case  before  us.  Until  that  determination  is  made 
the  contract  is  in  force. 

The  judgment  of  the  court  refusing  an  increase  in  fare 
may  now  be  contrasted  with  another  case  in  which  the 
Commission  reduced  the  franchise  rate  of  a  company  as 
unreasonable.  The  court  sustained  the  action  of  the  Com- 
mission on  the  ground  that  the  common  council  of  a  city 
has  no  power  to  make  a  contract  with  a  street  railway 
company  fixing  rates  of  fare  for  a  series  of  years,  which 
would  prevent  the  Railroad  Commission  from  changing  the 
rate  at  any  time.  The  case  was  brought  by  the  Milwaukee 
Electric  Railway  &  Light  Company  to  vacate  an  order 
of  the  Commission  requiring  the  company  to  sell  tickets 
in  packages  of  thirteen  for  fifty  cents,  instead  of  twenty- 
five  for  one  dollar,  as  provided  in  an  ordinance  passed 
by  the  city  and  accepted  by  the  company  in  January,  1900. 
The  turning-point  of  the  case  was  whether  Section  1862  of 
the  statutes,  which  provides  that  city  councils  may  grant 
the  use  of  street  railway  companies  "upon  such  terms  and 


332     RAILROADS  AND  PUBLIC  UTILITIES 

conditions"  as  they  may  determine,  gives  power  to  the 
council  to  make  a  contract  with  the  company  that  it  shall 
have  a  right  to  charge  certain  fares  for  a  series  of  years, 
which  contract  cannot  be  interfered  with  or  impaired  by 
the  legislature  or  the  Railroad  Commission.  The  opinion  x 
by  Chief  Justice  Winslow  says  in  part : 

The  power  to  fix  rates  and  tolls  to  be  charged  by  public  utili- 
ties is  one  of  the  attributes  of  sovereignty.  With  us  this  great 
power  is  vested  in  the  legislature,  and  when  the  legislature  speaks 
upon  the  subject  its  voice  is  controlling  and  supreme,  unless  in- 
deed some  constitutional  guaranty  is  invaded.  Madison  v.  M.  G. 
&  E.  Co,  129  Wis.,  249.  A  century  ago  this  great  power  was 
of  little  practical  importance,  and  very  seldom  used.  The  public 
utility  as  we  know  it  had  not  yet  come;  life  was  comparatively 
simple,  individual  wants  few  and  individual  resources  generally 
sufficient  to  provide  for  them;  the  ordinary  citizen  knew  little 
about  gas  and  less  about  electricity,  which  he  regarded  as  nothing 
more  than  a  supernatural  and  remorseless  destroying  force.  He 
drove  his  own  horse,  if  fortunate  enough  to  own  one,  drank  water 
from  his  own  well,  had  no  telephone,  sent  no  telegrams,  used  no 
railroad,  sent  no  express  packages,  and  was  dependent  upon  no 
public  utility,  either  for  the  necessities  or  luxuries  of  life.  No 
such  life  is  possible  to-day,  however.  The  progress  of  science 
and  invention,  combined  with  the  tremendous  growth  of  congested 
urban  areas,  has  made  the  great  mass  of  the  people  absolutely 
dependent  upon  the  gi'eat  public  utilities  of  the  time.  Modern 
business  and  modern  life  could  not  go  on  without  them.  The  ur- 
ban citizen  of  to-day  goes  to  his  business  upon  the  street  railway 
and  transacts  it  with  the  aid  of  the  telegraph,  the  telephone,  the 
express  company,  and  the  commercial  railway.  The  gas  and  elec- 
tric companies  light  his  home,  cook  his  meals,  furnish  him  power 
for  domestic  operations,  and  sometimes  even  furnish  him  heat; 
while  water  companies  provide  him  with  water  and  telephone  com- 
panies afford  him  opportunity  at  any  moment  for  conversation 
with  friends  either  at  home  or  in  distant  cities. 

1  Milwaukee  Electric  Railway  4"  Light   Co.  v.  Eailroad  Commis- 
sion of  Wisconsin,  142  N.  W.  Rep.,  491, 


COMMISSION  AND  THE  COURTS  333 

We  must  catalogue  our  public  utilities  and  try  to  imagine 
how  we  would  get  along  without  them,  if  we  would  realize  our 
dependence  upon  them;  only  by  so  doing  can  we  appreciate  the 
supreme  importance  of  the  rate-making  power  and  the  neces- 
sity of  keeping  that  power  intact  in  the  hands  of  the  legislature ; 
if  it  be  not  so  kept  the  opportunities  for  abuse  are  numerous. 
Clearly  the  legislature  should  not  part  with  the  power,  even  for 
a  limited  time,  except  upon  the  most  potent  and  convincing  con- 
siderations. 

No  presumption  can  be  indulged  that  it  has  parted  with  the 
power,  nor  will  doubtful  words  be  construed  as  having  that  ef- 
fect. He  who  asserts  that  the  state  has  surrendered  any  part  of 
its  sovereign  power  even  temporarily  in  his  favor  must  prove  the 
fact  by  the  most  convincing  evidence.  The  presumptions,  if  any 
there  are,  must  run  the  other  way.  If  it  were  to  be  admitted 
for  the  purpose  of  the  argument  that  the  legislature  could  by 
express  language  authorize  municipal  authorities  to  make  con- 
tracts with  public  utilities  fixing  rates  that  should  exist  for  defi- 
nite periods  in  the  future  and  be  beyond  legislative  control  dur- 
ing those  periods  (a  proposition  concerning  which  we  intimate  no 
opinion),  the  question  here  is  whether  such  express  language  is 
to  be  found  in  Section  1862. 

After  reviewing  all  of  the  authorities  the  Opinion  arrives 
at  the  conclusion  that  the  section  was  not  intended  to  give 
city  councils  power  to  bargain  away  the  sovereign  right 
of  the  state  to  regulate  fares,  and  concludes  thus : 

We  reach  this  conclusion  the  more  readily  because  this  state 
has  adopted  an  eminently  just  and  wise  policy  in  dealing  with  the 
matter  of  rates  and  tolls.  By  the  Railroad  Commission  legisla- 
tion it  has  laid  down  the  general  rule  that  every  rate  must  be 
reasonable,  and  has  left  it  to  a  commission  of  experts  to  deter- 
mine, after  full  investigation,  the  reasonable  rate,  and  apply  it. 
It  is  believed  that  this  board  passes  on  these  questions  with  judi- 
cial fairness  after  the  most  careful  and  searching  investigation 
of  the  conditions,  and  with  a  single  eye  to  the  attainment  of  a 
fair  result.    So  long  as  these  provisions  of  law  remain  in  force, 


334     RAILROADS  AND  PUBLIC  UTILITIES 

and  are  allowed  to  control  the  situation,  all  danger  of  immature, 
hasty  or  vindictive  changes  in  rates  is  practically  eliminated. 
On  the  one  hand,  the  citizen  is  protected  from  unreasonable  and 
excessive  fares;  on  the  other,  the  capitalist  and  inventor  is  as- 
sured a  reasonable  and  fair  return  upon  his  investment.  No 
door  is  open  for  any  serious  injustice. 

The  view  which  is  here  taken  of  the  meaning  and  effect  of  the 
provisions  of  Section  1S62  renders  unnecessary  any  consideration 
of  the  question  whether  the  ordinances  in  question  are  subject  to 
alteration  or  repeal  under  Section  1  of  Article  XI  of  the  Consti- 
tution, which  authorizes  the  enactment  of  general  laws  for  the 
formation  of  corporations  without  banking  powers,  and  forbids 
the  creation  of  corporations  by  special  act  except  in  certain  in- 
stances, and  reserves  the  right  to  alter  or  repeal  at  any  time  all 
such  general  laws  or  special  acts. 

The  proposition  decided  in  this  case  is  that  Section  1862, 
Statutes,  does  not  empower  municipal  authorities  to  make  any 
contract  with  a  street-railway  company,  fixing  rates  of  fare  so 
that  they  may  not  be  changed  by  the  legislature,  or  through  a 
legislative  agency  in  the  manner  provided  by  law. 

The  Wisconsin  court  was  sustained  in  the  Milwaukee 
fare  case,  June  14,  1915,  by  the  United  States  Supreme 
Court.  The  question  as  to  whether  burdensome  provisions 
of  an  old  franchise  were  retained  after  a  company  had  re- 
ceived an  indeterminate  permit  under  the  Public  Utility 
Law  was  decided  in  the  case  of  the  City  of  La  Crosse  v. 
La  Crosse  Gas  &  Electric  Company}  This  case  arose  upon 
the  refusal  of  the  utility  company,  which  had  surrendered 
its  franchise  and  received  an  indeterminate  permit,  to 
continue  paying  a  2-per-cent  fee  on  its  gross  earnings 
annually  into  the  city  treasury  required  under  the  terms 
of  the  franchise  for  the  use  of  the  streets.  The  court  held 
that  the  city  of  La  Crosse  had  no  power,  in  granting  this 

1  La  Crosse  v.  La  Crosse  Gas  fy  Electric  Co.,  145  Wisconsin  Ee- 
ports,  408;   130  N.  W.  Eep.,  530. 


COMMISSION  AND  THE  COURTS  335 

franchise,  to  annex  the  license  or  tax  features.  Such  a 
power  it  pointed  out  must  be  plainly  conferred  upon  a  city 
in  order  to  be  valid.  The  city  acted  as  an  agent  of  the  state 
in  granting  the  franchise  and  by  the  company's  voluntary 
surrender  of  it  and  the  acceptance  by  the  state,  they  mu- 
tually "agreed  to  abrogate  the  franchise  and  necessarily, 
as  we  shall  see,  the  incidents  attached  by  the  state  agency 
were  abrogated  likewise.  Such  mere  incidents  could  not 
well  inferably  survive  the  primary  thing."  Continuing 
the  reasoning  further,  the  court  says  that  though  the  city 
had  the  power  to  attach  the  license  fee  requirement  to  the 
franchise,  the  indeterminate  permit  operated  to  free  the 
utility  of  the  burden.  Its  reasoning  is  to  the  effect  that 
an  indeterminate  permit  is  granted  subject  to  the  terms  of 
the  Public  Utility  Law,  and  not  subject  to  other  terms  and 
conditions  which  may  be  found  in  the  franchise  surrendered 
and  which  are  out  of  harmony  with  the  uniformity  idea 
of  franchises  in  the  public  utility  statute. 

Briefly  stated  the  La  Crosse  case  lays  down  the  rule  that 
conditions  and  privileges  which  "inhere  in"  and  "form  a 
part  of"  the  grant  of  the  right  to  use  the  streets  are 
grants  by  the  city  as  a  state  agency  and  are  abrogated  by 
the  waiver  on  the  part  of  both  the  state  and  the  utility 
consummated  by  the  acceptance  of  the  indeterminate  per- 
mit. It  is  almost  as  plainly  indicated — an  inference  which 
will  be  more  fully  discussed  in  the  Douglas  County  tele- 
phone case — that  conditions  that  do  not  "inhere  in"  and 
"form  a  part  of"  the  grant  of  the  privilege  itself  but  are 
independent  business  contracts  for  service  to  be  rendered, 
are  subject  to  the  ordinary  rules  of  contracts,  entered  into 
by  the  city  as  a  business  corporation,  and  cannot  be  abro- 
gated by  the  state. 

Still  another  phase  of  the  indeterminate  permit  law 
arose  in  the  Calumet  service  case.  As  already  explained 
in  an  earlier   chapter,   utilities  under  the   indeterminate 


336     RAILROADS  AND  PUBLIC  UTILITIES 

permit  are  protected  from  competition,  except  as  the  Com- 
mission may  find  upon  investigation  and  hearing  that  pub- 
lic convenience  and  necessity  demand  the  service  of  a  com- 
peting plant.1  Upon  a  disagreement  between  the  Calumet 
Service  Company  and  the  city  over  street-lighting  rates,  the 
city  asked  the  permission  of  the  Commission  for  the  right 
to  establish  a  municipal  plant  to  do  street  lighting.  This 
was  refused  on  the  ground  that  the  city  could  obtain 
adequate  service  at  reasonable  rates  from  the  existing  com- 
pany. An  appeal  was  made  to  the  courts,  the  supreme 
court  holding  that,  while  the  city  had  the  right  to  purchase 
the  existing  plant,  it  could  not  enter  into  competition  with 
it  without  an  order  from  the  Railroad  Commission.2  In 
the  opinion  of  the  court  Justice  Marshall  reviews  the  pur- 
pose of  the  Public  Utility  Law  at  great  length  and  says: 

That  one  of  the  principal  mischiefs  sought  to  be  remedied  by 
the  new  system  was  the  elimination  of  the  conditions  promotive 
of  hostilities  between  municipalities  and  public  utility  companies, 
after  making  large  investments  by  permission  and  invitation  to 
serve  the  public  directly  as  well  as  indirectly — bitter  controversies, 
sometimes  for  good  reasons  and  sometimes  not,  but  in  any  event 
at  the  expense  of  consumers  of  the  product — seems  quite  certain. 

It  likewise  seems  certain  that  one  of  the  major  means  for 
attaining  the  desired  end  was  elimination  of  excessive  investments, 
and  excessive  expenses  caused  by  two  or  more  public  utilities,  each 
with  its  separate  property  and  fixed  charges,  where  the  need  of 
the  consumers  only  required  one,  and  elimination  of  risks  to  in- 
vestors by  encroachments  upon  an  occupied  field  of  public  ser- 
vice without  any  public  necessity  therefor.  Doubtless  an  unvary- 
ing and  invariable  economic  law  was  squarely  faced  and  appre- 
ciated, that  all  such  subjects  for  elimination  represent  waste, 
which  if  not  avoided  would,  in  the  main,  fall  on  the  product,  in- 

1  See  Ch.  XV  for  a  fuller  discussion  of  the  economic  reasons 
prompting  the  passage  of  the  indeterminate  permit  law. 

2  Calumet  Service  Co.  v.  Chilton,  148  Wisconsin  Reports  334 ;  135 
N    W.  Rep.,  131. 


COMMISSION  AND  THE  COURTS  337 

creasing  the  cost  of  service  per  unit,  and  be  paid  by  the  con- 
sumers. It  was  the  interests  of  consumers  which  was  the  prime 
subject  of  legislative  solicitude;  such  object  to  be  conserved  with- 
out injustice  to  others. 

In  the  situation  pictured  it  could  not  have  escaped  legislative 
consideration,  and  necessarily  would  not  have  been  considerately 
left  unguarded  against,  that  in  the  cities  and  villages  of  the  state, 
in  general,  public  utility  service  at  the  lowest  practicable  rates 
with  the  highest  practicable  efficiency,  is  impossible  without  com- 
bining the  municipal  service  with  that  to  others. 

After  discussing  other  considerations  why  the  legisla- 
ture would  have  reasonably  included  municipal  plants  with- 
in the  provisions  of  the  law  and  not  have  allowed  them  to 
start  menacing  existing  investments  whenever  they  de- 
sired, the  court  reviews  the  method  by  which  the  city  can 
purchase  the  plant  under  the  terms  of  the  law  and  con- 
cludes thus: 

The  conclusion  which  must  result  from  the  foregoing  is  that 
the  relief  granted  respondent  is  not  excessive.  The  field  of  ex- 
clusiveness  of  the  privilege,  in  the  circumstances  in  this  case,  in- 
clude municipalities,  whether  desiring  to  evade  the  forbidden  ter- 
ritory for  municipal  lighting  only,  or  for  other  or  all  purposes. 

This  decision  has  been  criticized  severely  by  Socialists 
because  it  does  not  permit  a  municipality  to  establish  a 
plant  at  any  time,  but  requires  it  to  purchase  the  existing 
plant  if  it  desires  to  enter  the  public  utility  business.  The 
fact  is,  nevertheless,  that  the  method  provided  for  acquir- 
ing public  utilities  by  municipalities  has  given  impetus 
to  municipal  ownership.  A  city  under  the  law  may  pur- 
chase a  private  plant  at  a  valuation  to  be  fixed  by  the  Com- 
mission, and  if  there  is  but  one  plant  operating  in  the 
municipality  it  thereby  obtains  a  monopoly  of  the  business. 

Practically  the  same  rule  was  promulgated  in  another 


338     RAILROADS  AND  PUBLIC  UTILITIES 

case  except  that  the  proposed  utility  was  to  be  a  com- 
peting private  plant.1  The  court  held  that  where  an  in- 
determinate permit  had  been  acquired  the  municipality 
could  not  grant  a  conflicting  franchise  unless  the  Railroad 
Commission  had  upon  ascertainment  of  facts  determined 
that  public  convenience  and  necessity  required  a  second 
utility  to  engage  in  the  same  business.  In  the  absence  of 
such  a  declaration  by  the  Commission  a  municipality  was 
without  authority  to  grant  a  competing  franchise. 

The  distinction  between  a  franchise  provision  that  is 
accepted,  subject  to  the  constitutional  reservation  that  the 
legislature  may  repeal  or  amend  the  same  at  any  time, 
and  an  independent  contract  in  no  way  connected  with 
the  franchise,  is  made  in  the  case  of  Superior  v.  Douglas 
County  Telephone  Company.2  In  order  that  it  might  fur- 
nish its  subscribers  with  telephone  connections  at  the  city 
hall,  the  company  entered  into  a  contract  with  the  city  to 
furnish  free  service  for  an  indefinite  period,  in  return  for 
the  privilege  of  being  allowed  to  wire  the  city  hall  and 
install  phones  in  the  city  offices. 

The  validity  of  the  contract  was  challenged  because  of 
the  prohibition  of  the  statute  against  free  service.  To 
determine  the  question,  the  Commission  took  the  position 
that  its  general  order  wiping  out  all  free  service  and  reduc- 
ing rates  was  applicable  to  the  city  of  Superior  in  the 
particular  mentioned.  The  court  held  the  contract  valid 
on  the  ground  that  it  was  especially  exempted  by  the  statute 
declaring  all  existing  contracts  as  non-discriminatory.  It 
was  also  held  that  the  term  thereof  was  not  indefinite 
because  it  provided  specifically  that  the  company  should 
render  the  service  so  long  as  it  operated  a  plant  within  the 

1  State  ex  rel.  Kenosha  Gas  cf  Electric  Co.  v.  Kenosha  E.  E.  Co., 
145  Wisconsin  Eeports,  337;   129  N.  W.  Eep.,  600. 

2  Superior  v.   Douglas  County   Telephone  Co.,  141  Wisconsin   Ee- 
ports, 363;   122  N.  W.  Eep.,  1023. 


COMMISSION  AND  THE  COURTS  339 

city.  The  distinction  made  by  the  court  between  this  case 
and  the  case  of  the  La  Crosse  Gas  &  Electric  Company  * 
is  that  in  the  former  "the  contract  was  in  the  nature  of 
an  ordinary  agreement  inter  partes.  It  did  not  inhere 
in  a  franchise  corporate  or  otherwise."  The  Superior  city 
contracts  were  outside  the  scope  of  the  state  agency  au- 
thority and  involve  in  contradistinction  to  that  authority 
"the  granted  business  capacity  of  a  municipality  or 
other  corporation  to  make  contracts  as  a  private  per- 
son might,  within  the  scope  of  the  municipal  power  to 
contract. ' ' 

Perhaps  the  reason  for  exempting  the  contract  can  be 
made  plainer  when  considered  in  connection  with  the  deci- 
sion of  the  Home  Telephone  Company  of  Kenosha.  Here 
a  franchise  contract  is  involved,  rather  than  a  business 
agreement.  The  company  had  been  granted  a  franchise 
containing  the  stipulation  that  telephones  were  to  be  fur- 
nished free  to  the  city.  Under  the  order  of  the  Commission 
against  free  and  discriminatory  service  the  company  re- 
fused to  furnish  the  service  longer  to  the  city  of  Kenosha 
free.  The  city  sought  through  the  courts  to  enjoin  the 
company  from  charging  a  rental.2  The  court  held  that 
regardless  of  the  Public  Utility  Law  the  franchise  granted 
by  the  city  to  the  company  was  inoperative  and  void.  The 
franchise  conferred  upon  this  company  under  the  general 
statutes  "gives  it  full  authority  to  construct  its  lines  upon 
the  public  highways  of  the  state  and  the  streets  of  muni- 
cipalities subject  only  to  reasonable  regulation  under  police 
power.  A  city  ordinance  purporting  to  grant  a  franchise 
to  a  telephone  company  and  requiring  the  company  in 
consideration  therefor  to  furnish  a  certain  number  of  free 
telephones  to  a  city,  cannot  be  considered  as  a  contract. 

1  La  Crosse  v.  La  Crosse  Gas  $•  Elec.  Co.,  supra. 

2  City  of  Kenosha  v.  Kenosha  Home  Telephone  Co.,  149  Wisconsin 
Eeports,  338;   135  N.  W.  Eep.,  848. 


340     RAILROADS  AND  PUBLIC  UTILITIES 

The  city  in  such  case  on  its  proprietary  right  has  no  con- 
sideration to  give  for  such  contract  for  it  cannot  barter 
the  exercise  of  its  police  power  for  free  telephones;  and 
as  a  state  agency  the  city  has  no  power  to  enter  into  a 
contract  not  subject  to  amendment  by  the  Public  Utility 
Law." 

The  right  of  a  city  to  make  a  contract  with  a  utility 
since  the  Public  Utility  Law  was  passed,  which  by  a  subter- 
fuge amounts  to  free  service,  has  also  been  condemned  by 
the  supreme  court.  When  the  Southern  Wisconsin  Power 
Company  built  its  generation  dams  at  Kilbourn  City  it 
was  found  that  the  land  used  by  the  municipal  water  and 
lighting  plants  would  be  flooded.  After  nearly  three  years 
of  bickering  the  company  finally  consented  to  rebuild  the 
plants  for  the  city  in  another  locality  and  pay  the  sum  of 
$3,500  annually  for  a  period  of  time  and  the  city  was  in 
turn  to  purchase  power  from  the  company  at  the  regular 
rates.  At  the  end  of  the  first  six  months  the  city  of  Kil- 
bourn brought  an  action  to  recover  the  $1,750  due.  The 
company  interposed  a  counter-claim  of  $1,928.08  for  cur- 
rent used.  The  court  found  that  the  contract  was  in  fact 
one  for  the  furnishing  of  free  service,1  the  company  origi- 
nally agreeing  to  pay  the  municipality  these  sums  as  a 
subterfuge.  The  court  held  that  a  municipality  buying 
power  from  another  public  utility  for  the  operation  of  its 
own  plant  stands  on  the  same  footing  as  a  private  consumer 
and  cannot  be  given  a  more  advantageous  rate  than  other 
users  are  charged  for  like  service. 

The  contract  was  made  before  the  Kilbourn  dam  plant 
became  operative  and  the  claim  was  made  that  for  this 
reason  the  contract  was  exempted  from  the  provisions  of 
the  Public  Utility  Law.  Justice  Barnes  in  the  opinion 
of  the  court  replied : 

1  Kilbourn  City  V.  Southern  Wisconsin  Power  Co.,  149  Wisconsin 
Eeports,  169 ;  135  N.  W.  Eep.,  499. 


COMMISSION  AND  THE  COURTS  341 

We  cannot  adopt  this  view.  If  it  is  correct,  then  any  pro- 
jected railroad  could,  at  any  time  before  the  road  actually  com- 
menced to  serve  the  public,  enter  into  perpetual  contracts  whereby 
certain  shippers  were  favored.  Any  new  telephone,  electric  light 
or  water  company  could  make  all  kinds  of  discriminatory  con- 
tracts before  they  actually  began  to  serve  the  public.  It  is  the 
duty  of  any  new  utility  to  make  its  schedule  of  rates  and  file  it 
with  the  Railroad  Commission  at  or  before  the  time  it  commences 
to  do  business.  Sec.  1797m-33.  The  matter  of  regulating  rates 
of  charge  by  public  service  corporations  and  preventing  dis- 
criminations is  a  governmental  function  and  one  over  which  the 
legislative  branch  of  the  government  has  a  right  to  legislate 
within  constitutional  lines,  and  any  contract  which  runs  counter 
to  a  valid  law  in  this  regard,  and  that  was  not  made  under  direct 
legislative  authority,  becomes  superseded  thereby  regardless  of 
whether  it  was  made  before  or  after  the  law  was  enacted. 

It  is  interesting  to  note  in  this  connection  that  the 
Commission  has  since  reduced  the  rates  to  be  charged 
Kilbourn  City  for  the  service  nearly  50  per  cent. 

In  the  absence  of  proof  that  a  special  contract  to  furnish 
telephone  service  is  unreasonably  discriminatory,  but  a 
mere  difference  in  dealing  with  customers,  it  is  not  con- 
demned by  the  court.1  A  stockholder  and  a  telephone  com- 
pany made  a  special  contract,  the  stockholder  paying  10  per 
cent  above  par  for  his  stock  and  it  being  written  into  the 
certificate  that  he  should  have  the  use  of  a  telephone  and 
would  never  be  required  to  pay  a  greater  annual  assess- 
ment on  his  stock  than  $10.  After  the  Public  Utility  Law 
went  into  effect  the  company  attempted  to  collect  a  regular 
monthly  rental.  Speaking  through  Justice  Marshall  the 
court  said: 

The  point  that  the  contract  was  discriminatory  at  common 
law  is  met  by  Superior  v.  Douglas  County  Telephone  Company, 

1  People's  Telephone  Co.  v.  Lewis,  151  Wisconsin  Reports,  75;  138 
N.  W.  Rep.,  100. 


342     RAILROADS  AND  PUBLIC  UTILITIES 

supra,  holding  that  only  unreasonable  discriminations  are  so  con- 
demned, and  absence  of  proof  that  there  was  any  such  discrimina- 
tion in  this  case.  .  .  .  The  case  presents  the  question  of  whether 
a  mere  special  contract  with  a  public  utility  corporation  for  ser- 
vices made  prior  to  the  time  limit  mentioned  in  Sec.  1797m-91, 
one  not  adhering  in  a  corporate  franchise  and  so  superseded  by 
the  Public  Utility  Law,  but  an  ordinary  agreement  for  service, 
recognized  as  valid  and  expressly  given  validity  by  such  section, 
.  .  .  can  be  relied  on  by  one  party  thereto  as  binding  on  the 
other  seeking  to  repudiate  it.  No  reason  is  perceived  why  the 
answer  should  not  be  in  the  affirmative  as  it  was  below. 

Again  in  a  contract  between  two  telephone  companies, 
each  of  which  had  lines  in  the  same  territory,  that  one 
should  confine  its  operations  to  the  city  and  the  other  to 
the  country,  that  they  would  make  free  connections  and 
the  rates  would  be  less  than  the  two  separate,  was  found 
by  the  court  not  to  be  a  combination  to  restrain  or  prevent 
competition   within  the   meaning  of  the   statutes.1     This 
contract  provided  that  the  rural  company  should  have  the 
option  of  buying  the  rural  lines  of  the  other  and  that  both 
having  used  the  free  connection  the  agreement  constituted 
a    mutual   consideration,    and   the   rural    company   could 
enforce  the  specific  performance  of  the  agreement,  to  which 
the  city  company  was  objecting,  to  sell  the  rural  lines. 
More  recently  the  court  has  sustained  the  Commission  in 
a  finding2  to  the  effect  that  a  local  service  rendered  by 
a  rural  telephone  company  which   was  incidental   to   its 
rural  and  toll  line  service  did  not  constitute  the  rural  com- 
pany as  a  public  utility  engaged  in  furnishing  local  tele- 
phone service  to  subscribers  in  that  city.     This  decision 
strengthens  the  policy  of  the  law  as  interpreted  by  the 

1  McKinley  Telephone  Co.  v.  Cumberland  Telephone  Co.,  140  N.  W. 
Eep.,  38. 

2  Citizens  Telephone  Company  of  Eau  Claire  v.  Sailroad  Commis- 
sion of  Wisconsin,  157  Wisconsin  Eeports,  498. 


COMMISSION  AND  THE  COURTS  343 

Commission  that  duplications  of  telephone  exchanges  are 
unwise  and  that  competition  will  not  be  permitted  unless 
the  same  actually  existed  before  the  law  was  passed. 

The  question  as  to  whether  the  Commission  can  compel 
two  competing  telephone  companies  to  make  physical  con- 
nections is  still  being  litigated  in  the  lower  courts.  Such  a 
law  has  been  held  invalid  in  many  states,  but  the  Wisconsin 
Commission  believes  it  has  succeeded  in  framing  an  order 
which  obviates  all  of  the  legal  pitfalls  that  have  nullified 
the  laws  in  other  states. 

There  has  been  scarcely  no  important  litigation  over 
the  question  of  service.  In  one  case  1  the  court  held  that 
the  rule  of  a  heating  utility  that  had  been  filed  with  the 
Commission  providing  for  the  installation  of  thermostats 
by  the  company  at  cost  to  the  subscriber,  the  user  of  heat 
having  no  regular  contract  to  furnish  heat  for  a  fixed 
time,  was  not  an  unreasonable  requirement.  It  held  that 
in  the  absence  of  such  a  contract  there  was  no  ground  for 
interference  by  a  court  of  equity  to  restrain  the  company 
from  discontinuing  the  service  because  of  refusal  to  com- 
ply with  the  rule. 

When  a  landlord  operates  a  heating  plant  and  sells  his 
excess  service  to  a  few  neighbors  in  the  interest  of  his 
own  plant  economy,  such  an  arrangement  does  not  con- 
stitute his  plant  as  a  public  utility.  If  the  product  is 
intended  for,  and  open  to  the  use  of  members  of  society, 
who  may  desire  it  to  the  extent  of  the  plant's  capacity, 
the  owner  thereof  is  a  public  utility.  The  court  defines  2 
the  word  "public"  to  mean  more  than  a  limited  class 
defined  by  the  relation  of  landlord  and  tenant  "or  by  near- 
ness of  location,  as  neighbors,  or  more  than  a  few  who  by 

1  Walbridge  v.  Berlin  Public  Service  Co.,  151  Wisconsin  Reports, 
69;  138  N.  W.  Rep.,  44. 

2Cawker  v.  Meyer  et  al.,  147  Wisconsin  Reports,  320;  133  N.  W. 
Rep.,  157. 


344     RAILROADS  AND  PUBLIC  UTILITIES 

reason  of  any  peculiar  relation  to  the  owners  of  the  plant 
can  be  served  by  him." 

Students  of  regulation  have  not  always  found  them- 
selves in  complete  accord  with  the  decision  in  the  Douglas 
County  Telephone  case  and  the  Cawker  case  in  which  the 
term  public  is  given  a  somewhat  limited  definition.  But 
there  are  so  few  cases  affected  by  either  of  these  rulings 
that  they  are  considered  only  momentary,  compared  with 
the  broader  interpretation,  which  the  court  has  given  to 
the  terms  of  the  Public  Utility  Law  where  great  principles 
were  involved  and  important  public  interests  in  the  balance. 
The  Milwaukee  fare  decision  will  always  stand  out  as  a 
monument  to  the  court  for  the  doctrines  there  promulgated 
— the  unshackling  of  a  manacled  public. 


CHAPTER  XXIV 

CONCLUSION 

Contrasting  present  conditions  with  those  before  the 
period  of  regulation,  the  evidences  of  advance  are  too  many 
to  escape  the  conclusion  that  state  regulation  has  been  a 
success.  Perhaps  it  has  not  fulfilled  the  iridescent  dream 
that  many  entertained.  Its  stability,  however,  rests  upon 
a  continuance  of  the  methods  and  policies  pursued.  Fail- 
ure to  continue  along  the  lines  already  followed  would 
quickly  result  in  retrogression. 

The  saving  feature  of  the  Wisconsin  law,  which  placed 
it  above  many  of  the  similar  enactments  in  other  states, 
is  the  publicity  requirement.  All  the  facts  gathered  by 
investigations  as  to  the  value  of  properties,  the  quality  and 
cost  of  the  service,  are  disclosed  to  the  public.  Decisions 
are  all  printed ;  the  files  of  the  Commission  are  open  to 
public  inspection  and  there  are  no  secret  hearings.  The 
public  is  taken  into  confidence. 

Since  the  enactment  of  the  law  there  has  been  less 
lobbying  by  railroad  and  utility  lobbyists  before  the  legis- 
lature. Instead  of  giving  direct  relief  by  statutes,  power 
to  correct  new  evils  arising  is  given  to  the  Railroad  Com- 
mission in  order  that  the  problems  may  be  settled  justly 
after  a  scientific  investigation.  Such  legislation  has  prac- 
tically, if  not  completely,  driven  the  railroads  out  of 
politics. 

Moreover,  regulation  has  quieted  public  clamor,  always 
a  disturbing  factor  to  business.    With  railroad  and  utility 

345 


346     RAILROADS  AND  PUBLIC  UTILITIES 

patrons  paying  rates  on  the  same  basis  for  service  ren- 
dered ;  with  proof  from  the  annual  report  and  the  frequent 
audits  of  all  financial  dealings  of  these  corporations,  and 
the  consequent  elimination  of  extravagant  profits ;  with  the 
constant  supervision  of  operating  accounts  and  enforcement 
of  constantly  improving  service  standards,  and  finally  with 
the  elimination  of  all  unnecessary  wastes,  there  has  come 
about  a  condition  which  it  is  hoped  will  eventually  estab- 
lish an  "era  of  good  feeling."  It  is  now  possible  for  a 
dissatisfied  municipality  to  purchase  a  plant  that  it  was 
impossible  to  gain  control  of  before  the  indeterminate 
permit  law  was  passed.  Such  cities  find  encouragement  in 
the  law  because  through  state  regulation  they  have  the 
benefits  of  a  state  engineering  staff  for  consultation  and 
for  information  as  to  increasing  plant  efficiency.  The  in- 
suring stability  of  investments  and  public  contentment 
prove  the  worth  of  state  regulation.  Regulation  has  given 
better  service,  more  economical  and  scientifically  built 
rates,  and  has  completely  eliminated  unjust  discrimina- 
tions. 

In  the  eight  years  ending  June  30,  1913,  during  which 
the  Commission  has  had  jurisdiction  over  railroads,  the 
savings  in  freight  and  passenger  charges  to  the  public 
have  approximated  $2,400,000  annually.  The  six  years  of 
supervision  of  public  utilities  also  show  great  results.  The 
reductions  in  the  rates  of  gas,  water,  etc.,  amount  to 
$800,000  annually.  This  figure  does  not  include  the  sav- 
ings to  consumers  through  better  service,  which  a  very 
modest  estimate  would  place  at  more  than  $150,000.  This 
makes  an  annual  utility  saving  of  $950,000.  Thus,  the 
results  of  the  Commission  for  the  eight  years  of  its  exist- 
ence have  been  a  total  annual  saving  of  $3,350,000. 

Prior  to  1912  no  separation  of  the  cost  of  the  work  of 
the  Commission  was  kept  as  between  utility  and  railroad 
services.    At  the  beginning  of  that  fiscal  year,  however,  a 


CONCLUSION 


347 


cost  accounting  system  was  installed  so  that  now  it  is 
possible  to  allocate  the  expenses  of  the  different  phases  of 
the  work.  Herewith  is  given  a  table  showing  the  total 
expenses  of  the  Commission  for  each  year  since  its  organiza- 
tion, the  total  for  the  four  years  in  which  there  were  no 
cost  accounting  records  being  apportioned  on  the  basis  of 
the  two  years  for  which  records  are  available.  « 


Expenses  of  Commission 


Fiscal 

year 

Railroad 

Utilities 

Total 

1906      Actual 

$26,126.95 
35,314.84 
23,081.19 
33,343.48 
33,490.76 
41,750.17 
51,674.89 
56,364.71 

$26,127  95 

1907      Actual . 

35,314  84 

1908  Apportioned 

1909  Apportioned 

1910  Apportioned 

1911  Apportioned 

1912  Actual 

1913  Actual 

42,602.32 
61,544.05 
61,815.90 
77,060.78 
90,602.82 
108,787.80 

65,683.51 

94,887.53 

95,306.66 

118,810.95 

142,277.71 

165,152  51 

Total 

301,146.99 

442,413.67 

743,560  66 

The  population  of  the  state  is  nearly  2,500,000.  This 
means  that  the  Railroad  Commission  has  effected  a  direct 
annual  saving  per  capita  for  every  man,  woman  and  child 
in  the  state  of  $1.34,  and  it  is  not  difficult  to  conceive  how 
much  greater  the  annual  saving  is  to  the  actual  patrons 
of  these  public  service  institutions.  During  the  eight  years 
the  Commission  has  been  organized,  its  average  yearly  cost 
has  been  somewhat  less  than  $100,000,  or  a  per  capita 
expense  of  four  cents.  The  average  annual  return  is  $1.30 
or  3,250  per  cent  on  the  amount  invested. 

What  of  the  future  ?  The  increasing  scope  of  the  powers 
exercised  by  the  Interstate  Commerce  Commission  and  the 
limited  sphere  possible  in  regulation  of  rates  within  states 
suggest  that  the  future  may  see  the  establishment  of  sub- 


348     RAILROADS  AND  PUBLIC  UTILITIES 

sidiary  federal  commissions  that  will  regulate  railroads 
by  groups.  But  the  principle  of  regulation  will  persist. 
Wisconsin  has  made  progress  through  its  own  method  of 
regulation.  The  application  of  the  same  economic  princi- 
ples to  the  wider  spheres  of  national  control  might  well 
be  beneficial.  Until  this  is  done,  however,  a  state  com- 
mission that  devotes  a  large  part  of  its  time  to  railroad 
problems  is  absolutely  necessary. 

The  next  decade  is  apt  to  witness  great  changes  in 
the  sphere  of  railroad  regulation,  and  the  state  control  of 
public  utilities — gas,  electric,  water,  telephone,  interurban 
railroads  and  heating  companies — will  undoubtedly  be 
strengthened.  These  problems  are  local  and  beyond  the 
pale  of  federal  control.  Viewed  from  an  economic  stand- 
point, even  with  a  more  rapid  increase  of  municipal  owner- 
ship which  appears  probable  in  the  future,  state  regulation 
will  still  be  necessary.  For  municipal  plants  the  state  com- 
mission will  be  a  great  clearing  house  of  information — 
engineering,  statistical  and  managerial — where  the  latest 
methods  and  devices  of  reducing  costs,  making  scientific 
rates,  enforcing  of  rules  for  improved  service,  gathered 
from  over  the  world,  will  be  at  hand  and  may  be  applied 
to  the  arising  complicated  problems.  In  so  far  as  private 
plants  are  concerned,  the  existence  of  a  state  commission 
will  insure  fair  treatment  alike  to  capital  and  consumers 
and  vouchsafe  that  no  return  to  the  unequal  and  discrim- 
inatory rates  previously  in  existence  will  be  made.  Its 
powers  of  control  should  be  strengthened  rather  than  cur- 
tailed. 


INDEX 


Accidents,  railroad,  266-268 
at  crossings,  2,  6,  7,  327 
in  United  States,  267 
in  Wisconsin,  268 
investigation  of,  59 
to  employees,  267 
to  passengers,  267 
to  trespassers,  267 
Accommodation    freight   not 
classed  as  passenger  train, 
324 
Accounting,  69-78 

abnormalities  in,  76,   188-189 
annual  reports  show,  187 
depreciation  charges  in,  81 
for   municipal   plants,    208 
for  railroads  and,  13,  14,  117, 

118 
for     street     and     interurbans, 

161-162 
for  utilities  6,  13,  14 
importance  of,  75,  77,  97,  98 
Acetylene  plants,  279 
Active  connected  load  defined,  181 
Acts    to    regulate    railroads    and 

utilities,  1-8 
Actual    cost.      See    Unit    costs; 

Normal  prices 
Adams,  Charles  F.,  228 
Adams,  T.  S.,  51 
Ad  valorem  taxation  law,  21 
Alexander,  Walter,  9 
Amortization    systems    discussed, 
232-233 


Anti- duplication   law,   telephones 
and,  202-205 

Antigo  Water  Works  case,  36,  38, 
41,  220,  224 

Appeals  to  court  from  orders,  8, 
318 
effect   of    decisions   regarding, 
319 

Appleton,   early  electric  railway 
in,  159 
loss  of  electric  current  in,  190 

Appleton  Water  Works,   cost  of 
operation  of,  76 

Appleton  Water  Works  case,  mu- 
nicipal purchase  under,  38, 
39,  234 
sustained  by  court,  322 

Arizona,    1 

Ashland,   discriminations  in   wa- 
ter rates  in,  296 

Automatic     electric     alarms    or- 
dered installed  in,  271-272 

Baby    carriages,    as   luggage    on 
street  cars,  folded,  60 
wrapped,  166 

Balance  sheet,  72 

Barnes,  Justice  John,  9,  331,  340 

Basing  rates,  275 

Beaver  Dam  municipal  purchase 
case,  219,  234 

Beloit,    electric    rate    discrimina- 
tions in,  296 
loss  of  electric  current  in,  190 


349 


350 


INDEX 


Beloit,     saturation     of     territory 
in,   297 
water  mains  ordered  extended 

in,  220 
Black    Eiver    Falls,    flooding    of 

dams  of,  256 
Block  meter  rate,  electric,  173 
Block  signals,  inspection  of,  59 
Bloomer,  285 

' « Blue  Sky ' '  law,  247-248 
Bond  Discounts,  31 
Bondholders,     rights     of,     under 

surrender  of  franchise  for 

indeterminate  permit,  222 
Bonds,  237-248 

issues  of,  247 
Bridges,  improvements  of,  on  in- 

terurban   lines,    164-165 
Brodhead      municipal      purchase 

case,  234 
Buell  v.  C.  M.  #  St.  P.  E.  Co., 

cited,  decision,  117-118 
on  valuation  of  property,  24 
Business   basis   for  utilities,   96- 

108 

Cadby,  J.  N.,  address  by,  on 
preparation  of  telephone 
service  standards,  66 

California,  1,  252 

Calumet    Service    Co.    case,    336 

Capacity  expense.  See  Demand 
expense 

Capital,    easy    to    obtain,    under 
regulation,  312,  315 
court    sustains    regulation    of, 
328 

Capitalization,  evils  of  exces- 
sive, 238 

Capitalized  value,  27 

Car  loadings,  123 

Car  miles,  13,  124 


Car  miles,   increase   in,   for  elec- 
tric railways,  314 
Carloads,  rates  on,  122,  130 
Cars,  overcrowding  of,  60 

shortage  of,  266 
Cases,  before  Commission,  10,  14, 
312 
formal,  17,  18,  19 
informal,   17 
Cashton  municipal  purchase  case, 

38-39,  234 
Cawker  v.  Meyer  case,  343,  344 
Central    Illinois    Public    Service 
Co.,  302 
map  of,  305 
Charts,   showing  Commission  or- 
ganization, 12 
showing    discriminatory    rates, 

175,  176 
showing    regressive    municipal 
water  rate,  283 
Cheese  rates,  275 
C.   B.   &  Q.   B.  E.  Co.,   improve- 
ments   ordered    in    service 
of,    265 
passenger  service  case  of,  324 
C.  M.  &  St.  P.  E.  Co.,  crossings 
ordered     by     Commission 
for,  271 
Milwaukee    crossing    case    of, 

271 
stations  and  improvements  or- 
dered for,  265 
stock  issue  of,  243 
switching  case  of,  274 
C.  &  N.  W.  E.  Co.,  crossing  im- 
provements of,  271 
safety  work  of,  272-273 
stations  and  improvements  or- 
dered for,  264,  265 
validity  of  spur  track  law  test- 
ed in  case  of,  326 


INDEX 


351 


Cities,   benefits   of   state    regula- 
tion of,  310-311 

cannot  anticipate  future,  291- 
292 

council     method    of     granting 
franchises  to,  290 

defects  of  local  control  of,  298 

discriminatory   rates  under   lo- 
cal control  of,  295 

feasibility    of     regulation    of, 
294 

inability  of,  to  regulate  rates, 
306 

lack  of  comparative  unit  costs 
in  records  of,  299 

limitations  on  utility  contracts 
of,  339 

may  now  regulate  utilities,  293 

necessary  engineering  work  in, 
300 

power     to     purchase     existing 
plants  in,  207,  228,  234 

right  to   fix  rates  of  fare  in, 
333 

unit    of    regulation    too    small 
for,  301 

utilities  in  politics  of,  304 
Citizens'  Telephone  Company  of 
Eau     Claire     v.     Eailroad 
Commission,  342 
Class  rates  defined,  111 
Classification,    of    freight    rates, 
defined,  128 

of  utilities,  278  (note) 
Classification     charges,     relation 

of,  to  commodities,  133 
Classifications,  changes  in,  276 

differences  in  classes  of,   131 

how  determined,    129-130 

investigation    of,    by    Commis- 
sion, 16 

territory  of  different,  129 


Clintonville,  285 

Coal  rates,   274 

Cochrane  railroad  case,  324 

Cole,  William  M.,  69 

Colorado,  1 

Columbia   Eailway   &   Light   Co. 

case,  41 
Commercial  conditions,  effect  on 

freight  rates  of,  135-136 
Commission  and  court  valuations 

compared,   38 
Commissioners,  assistants  of,  10- 
12 
list  of,  9 

qualifications  for,  3 
railroad,  terms  of,  2 
Commodity  rates,  3,  111 
defined,  112 
division  of,  129 
lower   than   class   rates,   130 
Commons,  John  R.,  2,  8 
Commonwealth  Power  Co.,  Mich., 

302,  309 
Comparison  of  freight  rates,  134 
Competition,   7 

effect  of,  on  freight  rates,  135 
elimination    of,    through    inde- 

terminato  permit,  49 
under  franchise  regulation,  225 
Complaints      against      municipal 
plants,   278,  280 
for    railrond    service    improve- 
ments, 264 
how  made,  8 
settlement,   of,   18 
Composite  life  defined,  85 
Compound  interest  curve  method, 

SS 
Concentration  rates,  3,  111 

defined,  112 
Condensed  class  utilities,  196 

Connection  of  trains  ordered,  264 

7 


352 


INDEX 


Constitutionality      of      Railroad 

Commission  Law,  319 
Construction     expenditures     and 
operating     revenues    com- 
pared, 102 
Consumer  expense,  defined,   144 
method  of  separation  of,  150- 

153 
ratio  of,  to  total  expense,  148 
small  for  fire  service,  147 
for  water,  217 
Consumer's     electric     bill     com- 
puted,  183-185 
Contingencies,   allowance   for,   in 

fixing  valuation,  30 
Contractors'  profit  considered  in 

valuation,  31 
Contracts      between      competing 
companies,  342 
cities   cannot   make,   334,   335, 

338 
ordinances  not,  339,  340 
with  stockholders,  341 
Convenience  and  necessity  law,  4, 
7,  17 
applied    to    electric    railways, 

168 
effect  of,  227 
establishment   of   principle   of, 

338 
how  granted,  231 
provisions  of,  221 
sustained  by  court,  327 
Cooley,  Mortimer  E.,  22 
Copper    zone    rates,    on    interur- 

bans,  167 
Cost  of  reproduction,  23 
consideration  of,  32 
defined,   25 
less  depreciation,  25 
overhead  charge  allowed,  30 
sustained  by  courts,  41 


Cost  of  service  rates,   compared 
with  other  plans,  115-116 
for  utilities,  142,158 
method    of    rate-making    for, 

136-142 
per  unit  of  transportation,  120 
railroad,  113 
Court  and  Commission  valuations, 

38 
Courts,  317-344 

admonish  public,  322 

decision    of,    regarding    rates, 

320 
evidence  considered  by,  322 
interpretation      of      Wisconsin 
Railroad   Commission   and 
utility  laws  by,  317-344 
on    constitutionality    of    Rail- 
road Law,  319 
weight    of    decisions   of    Com- 
mission on,  321 
Cream  rates,   275,  325 
Crossings,  4,  15,  59 

accidents  on,  266-268,  327 
improvements  of,  269 
legality    of    law    apportioning 

expense  for,  326 
on  interurbans,  163-164 
separation  of  grades  for,  270- 
273 
Cross-talk  on  telephone  lines,  66 
Crosstown   lines  of   electric   rail- 
ways, 166 
Crushed  stone  rates,  133 
Cumberland    Municipal    Electric 
Light     plant,     inequitable 
rates  for,  281 

Dams,  safety  of  construction  re- 
quired for,  255-256 

Davidson,  James  O.,  calls  conser- 
vation  meeting,   249 


INDEX 


353 


Dead  weight,  effect  of,  on  freight 

rates,   123 
Decisions  of  Commission,   11 
appealed,  318 
when  courts  will  disturb  them, 

322 
when  effective,  19 
when  unreasonable,  321 
Decreasing   charge   rates,   water, 

216 
Demand  meter  rate,  electric,  173 
Demand  or  capacity  expense,  de- 
fined, 144 
in  making  gas  rates,  185 
in  making  water  rates,  218 
method    of    separation    of,    il- 
lustrated, 150-153,  181 
proportion  of,  to  total  expense 

for  water  service,  148 
relation  of,  to  total  operating 
expense,  146-147 
Demurrage,  4 
Density  of  traffic,  122 

effect  of,  on  freight  rates,  126 
Depots,  4 

See  also  Stations 
Depreciation,  79-95 

consideration  to,   given  in  fix- 
ing valuations,  42 
considered    in    making    utility 

rates,  144 
defined,  79-80 

"dollar  year"  and  "straight 
line"  methods  of  calculat- 
ing, defined,  85,  88-89 
how  determined,  84 
increases  in  allowance  for,  105 
methods   of    calculating,    illus- 
trated, 86-89 
of  railroads,  23 
of  utilities,   29-30 
on  rural  telephones,  204 


Depreciation,      requirements     of 

law  regarding,   82 
Depreciation    account,    must    be 

kept,  95 
Des  Moines  Gas  Company,  v.  Des 

Moines,  310 
Des   Moines   Water  Company  v. 

Des  Moines,  308 
Discounts,  on  stocks  and  bonds, 

244 
Discrimination,  abolished,  313 
effect  of,  207 
from  regressive  rates,  215 
in  electric  service  before  regu- 
lation, 175-177 
in  favor  of  city,  210 
in   rates  of   municipal   plants, 

280 
in    regressive    rate    schedules, 

282,  283  (chart) 
in  telephone  field,   194 
prohibited  to  railroad,  4 
special  rates  for,  213 
under  local  utility  control,  295 
Distance      carried,      effect      on 

freight  rate  of,  122 
Dividend   accounts  for  all  utili- 
ties, 103-104 
Dollar,  declines  in  value  of,  51 
"Dollar    year"    method    of    de- 
termining depreciation,  85, 
88 
illustrated,  86-88 
Double  transfers  ordered  on  elec- 
tric railways,   168 
Dress  goods  rates,  133 
Drinking  cups  free  to   traveling 

public,  265 
Dunn,  ' '  The  American  Transpor- 
tation     Question, ' '      328 
(note) 
Dwight  case,  319,  320,  321,  323 


354- 


INDEX 


Eau   Claire,  comparative  loss  of 

electric  current  in,  190 
early  electric  railway  in,  160 
Eau      Claire      municipal      water 

plant,     operating    expense 

of,  76 
Electric    plants,     aid    given    by 

state  to  municipal,  285 
amortization  of,  232 
amounts  needed  to  develop  in- 
dustry in,  53 
comparison  of  unit  costs  of,  98, 

99 
construction   expenditures   and 

operating      revenues      of, 

102 
defects  of  local  control  of,  301- 

302 
depreciation  tables  for,  82-88, 

93-94 
development  in   Wisconsin   of, 

315 
discrimination  in  rates  before 

regulation  of,  296 
dividend  account  of,  103 
effect   of    duplicate   plants   on 

rates  of,  227 
increases  for   depreciation   of, 

105 
inspection  of,  63 
kinds  of   rates  of,  172-174 
list    of    municipally    and    pri- 
vately owned,  279 
making   of   electric    rates   for, 

178-183 
making    of    electric    rates    on 

cost  of   service  basis  for, 

153-159 
operating  expense  and  revenues 

of,  106 
optional  indeterminate  permits 

to,  222 


Electric  plants,  public  benefit  of 
regulation  of,  64 
rate  of  return  allowed  for,  55 
rate  of  return  of,  46 
records    before    regulation    of, 

299 
results    from    adjustments    of, 

297 
standards  of  service  for,  57-58, 

170 
surplus  accounts  of,  101 
value  of,  9 
Elkhart,  285 
Elkhorn,  285 
Eminent  domain  in  water-power 

grants,  250,  251 
Employees     of     railroads,     acci- 
dents to,  266-268 
Energy  in  falling  water,  right  to 

use,  252 
Engineering  staff,   as  an  aid  to 
municipal  plants,  283 
as    an    aid    to    municipalities, 

208 
costs  of,  to  locality,  299-300 
determination    of    depreciation 

by,  84 
duties  of,  12,  13-14,  IS,  19,  22, 

59 
encouragement    of    safety    or- 
ganizations    on     railroads 
by,  272 
test      meters      on    application, 
62 
Engineering   superintendence,   23 
considered  in  fixing  valuations, 
30-31 
English    railways,    early    opposi- 
tion to,  262-263 
Erickson,    Halford    (commission- 
er),9 
defines  rate  of  return,  44 


INDEX 


35/ 


Erickson,    Halford,   investigation 
of  interest  rates  by,  52 

on  classification,  131 

on  depreciation,  84 

on    electric    rate-making,    157, 
178 

on    evils    of    duplicate    fran- 
chises, 227 

on  evils  of  unlimited  security 
issues,  241-242 

on    exemption    of    stocks    and 
bonds  from  regulation,  244 

on  extension  of  indeterminate 
permit  idea,  235 

on   indeterminate   permit   law, 
222 

on  making  cost  rates  for  wa- 
ter utilities,  150-153 

on  regulation  v.  profit  sharing, 
232-234 

on  separation  of  water  utility 
expenses,  147 

on  terminal  expenses,  127 

on  "value  of  the  service,"  115 

on  water  powers,  261 

on     "what     the     traffic     will 
bear,"  115 

opposes     non-monetary     stock 
law,  240 
Eshleman,  John  M.,  on  stock  and 

bond  regulation,  245 
Evidence,  character,  necessary  to 
set   aside    Commission   or- 
der, 320 

consideration  of,  322-323 
Express  companies,  3 

earnings  of,  109 

in  state,  276 

rates  of,  16 

reduction  of   express  rates  on 
electric  railways  by,  169 

value  of,  9 


Express  rate  case,  275 

saving  to  public  by,  276 

Extensions,  difficulty  of  making, 
when     plant     overcapital- 
ized, 239 
of  water  mains  ordered,  220 

Fair  value,  37-38 

method    of     determining,     ap- 
proved by  court,  41 
See   also    Valuation;    Physical 
valuation 
Fares,  right  to  increase,  regard- 
less of  franchise,  330 
See  also  Eates 
Fees,     charged     for     authorizing 
stock  and  bond  issues,  246 
Fire  protection,  .145 

cost  of,   should  be  treated   as 

whole,  149 
failure    of   cities   to    pay    full 

cost  of,  210 
miles  in  main  system  as  basis 

of  charging,  212 
requirements  of,  216 
separation  of  expense  for  fire 
service    from    expense    of, 
146-147 
Fire  tests  to  determine  adequacy 

of  water  service,  61 

Fixed    charges,    determined    for 

water   service,    150 

for  gas  and  electricity,   154 

Flagmen     ordered     at     railroad 

crossings,  271-272 
Flat  demand  rate,  electric,  173 
Flat   rates,    for    electricity,    fal- 
lacy of,   156 
for  water,  213,  214 
per   lamp   for  electric   service, 
172 
Florida,   1 


356 


INDEX 


Fond   du   Lac,   comparative   loss 

of  electric  current  in,  190 

Fond  du  Lac  municipal  purchase 

case,  38,  234 
Food  prices  increased,  51  (Table) 
Franchises,  6,  7 

consideration  of,  by  courts,  38- 

41 
constitutional  power  to  revoke, 

223 
control  of  utilities  by,  289 
defined,  224 

effect  of  utilities  law  on,  329 
license  tax  features  of,  334,  335 
life  of,  290 

method  of  granting,  254 
number  of  water-power,  grant- 
ed, 250,  251 
objections  to  short-term,  225 
opposition    to     special    water- 
power,  249 
perpetual,  224 
provisions  of,  256-257 

soon   obsolete,    291-292 
right  of  city  to  agree  on  rates 

in,   331-332 
right  to   abrogate   fare   provi- 
sions in,  330 
terms  of  water-power,  259 
to  telephone  companies,  339 
utility,  revoked,  222 
value  allowance  in  security  is- 
sues of,  242 
value  of,  32,  35,  36 
Free    or    reduced    telephone    ser- 
vice prohibited,  194 
when  legal,  338,   339,  340 
Freight  earnings,  109 
Freight  expenses,   separation  of, 

from  passenger,  120 
Freight  rates,  comparative,   133- 
134 


Freight    rates,    effect    of    reduc- 
tions   in,    on    investments, 
312 
effect  of  value  of  goods  on,  132 
savings  on  reductions  in,  274- 
276 
Fuel   expense    for    electric    utili- 
ties, 98 

Gas,   average  price  of,   in   1885 

and  1907,   291 
Gas  companies,  170-192 

block  system  rates  used  by,  177 
construction   expenditures   and 

operating  revenues  of,  102 
cost  of  engineering  advice  for, 

300 
defects    in    local    control    of, 

301 
development  of,  in  Wisconsin, 

315 
dividend  accounts  of,  103 
evils  of  two  franchises  for,  226 
expense  of  local  regulation  of, 

in  Iowa,  310 
heating  value  and  pressure  of, 

64-65 
increase    for    depreciation     in 

value  of,  105 
inspection  of,  15 
making  of  cost  rates  of,   185- 

189 
making  of  rates  of,  on  cost  of 

service  basis,  153-158 
operating    expenses    and    reve- 
nues of,  106 
optional  indeterminate  permits 

to,  222 
public  benefits  of  regulation  of, 

66,  170 
rate  of  return  from,  46,  55 
rates  of,  in  Chicago,  304,  306 


INDEX 


357 


Gas     companies,     standards     of 
service  of,  57-58,  170 
surplus  accounts  of,  101 
value  of,  9 

Gasoline  passenger-car  service, 
262-263 

Gasoline  plants,  279 

German  railways,  early  opposi- 
tion to,  263     . 

Gesell,  Prof.  G.  A.,  letter  on  op- 
tional indeterminate  per- 
mit law,   222 

Going  value  defined,  32-33 

Good  will,  32,  35 

Grades,  separation  of.  See  Cross- 
ings 

Graham  Ice  Company  v.  C.  M.  Sp 
St.  P.  E.  Co.,  validity  of 
reparation  law,  327 

Grain  rates  lowered,  275 

Grand  Kapids,  285 

Grand  Rapids-Muskegon  Power 
Company,  Michigan,  302, 
309 

Great  Northern  Railway  Com- 
pany, cost  of  new  stations 
built  by  Commission  or- 
der for,  265 

Green  Bay,  comparative  loss  of 
electric  current  in,  190 

Green  Bay  &  Western  Railway 
Co.,  cost  of  new  stations 
built  by  Commission  or- 
ders for,  265 

Gross  earnings,  of  electric  plants, 
315 
of  gas  companies,  315 
of  interurbans,  314 
of  telephone  companies,  315 
of  water  companies,  315 
of    Wisconsin     railroads    con- 
trasted,  313 


Group  rates,   defined,   113 

not  encouraged  by  Commission, 
126 

Hammond,  M.  B.,  quoted,  115 
Harlowe,  David,  9 
Heating,    of    electric    cars    regu- 
lated, 164 
Heating  companies,  5 

construction  expenditures  and 
operating  revenues  of,  102 

decision  in  service  case  of, 
343 

dividend  accounts  of,  103 

increases  for  depreciation  of, 
105 

inspected  regularly,  171 

list  of  municipally  and  private- 
ly owned,  279 

operating  expenses  and  reve- 
nues of,  106 

optional  indeterminate  permits 
to,  222 

service  standards  of,  61 

surplus  accounts  of,  101 

valuation  of,  9 
Heating  value  of  gas  before  reg- 
ulation    and     Commission 
requirement,  65 
Highways,     relocation     of,    near 
railroad  crossings,  269,  272 
Home  rule,  cannot  overstep  boun- 
daries of,  301 

contrasted  with  state  control, 
308,  310 

costs  of  comparative  units  and 
engineering  advice  under, 
299,  300 

defects  of,   298 

discriminations  under,  295 

expense  to  locality  of,  300 

feasibility  of,  294 


358 


INDEX 


Home    rule,    inability    to    adjust 
rates  under,  306 
little  used,  293 
possible  under  state  regulation, 

292-293 
regulation    of    utilities    under, 

289 
system   of    administration    un- 
der, 311 
utilities  in  politics  under,  304 
See  also  Local  regulation 
Home  rule  advocates,  regulation 

desired  by,  232 
Hopkinson  demand  rate,  electric, 
173 
general  use  of,  177 
Hours  of  labor,  4 
Hughes,  Justice  Charles  E.,  sus- 
tains spur  track  law,  326 
Husting,    Senator   Paul    O.,    251 
(note) 
author    of     water-power    law, 
253-254 
Hydrants,  system  of  basing  fire 
protection  rates  upon  num- 
ber of,  211 
Hydraulic     purposes,     franchises 

granted  for,  251 
Hydrographic  survey  of  naviga- 
ble streams,  255,  260 

Idaho,  1,  252 

Illinois  Public  Utility  Law,  2 
exempts  municipal  plants  from 

regulation,  206 
map  showing  fallacy  of,  305 
problem  of  local  regulation  un- 
der, 302 
separate   classification  of   rail- 
road rates  under,  129 
Illustrations,    12,    175,    176,   283, 
303,  305,  307,  309 


Incandescent     lamps,     inspection 

of,  62 
Income  statement,  72 
Indeterminate  permit,  6,  221-236, 
228 
accomplishments  of,   221 
applies   to   municipal   competi- 
tion, 338 
basis  of  opposition  to,  230 
benefits  of,  compared  to  fran- 
chises, 226 
benefits        of,        summarized, 

235 
cannot  enhance  property  value, 

37 
court  decisions  on,  230 
effect  of,  329,  330 

on  old  franchise  provisions, 
334,  335 
extension  of  principle  desired, 

235 
fundamental    to    state    regula- 
tion of  utilities,  290 
in  other  states,  221-222  (note) 
lowers  interest  rates,  49 
method  of  exercising,  234 
method  of  obtaining,  230 
more    valuable    than    ordinary 

franchise,    229 
of    no   value   when    supersedes 

ordinary  franchise,  39 
operation  of  optional,  223 
protection     from     competition 

by,  336 
provisions  of,  interpreted,  336- 

337 
See  also  Franchises 
Indiana,    1 

electric     railway     development 
in,  313 
Industrial    accidents   to    railroad 
employees,  266-268 


INDEX 


359 


Industries,    service    to,    by    spur 

tracks,  325-326 
Inspection    of    railroad   roadbed, 

272 
Inspectors,  15 

inspections  by,  of  private  and 

municipal  plants,  287 
make  tests  as  to  service  stand- 
ards, 58 
of  electric  lighting  plants,  63, 

171 
of  electric  railways,  60 
of  gas  plants,  65,  171 
of  heating  plants,  171 
of  telephone  plants,  67 
results  of  visits  of,  to  munici- 
pal plants,  285-286 
Interest,   an  element  in   rate   of 
return  of,  44,  46-50 
consideration     of,     in     making 

utility  rates,  144 
determination  of  rate  of,  51 
elimination  of  competition  low- 
ers rate  of,  49 
Interlocking     plants,     inspection 
of,  59 
on  interurban  roads,  164 
Interruptions    in    service,    record 

of,  62 
Interstate      Commerce      Commis- 
sion,     Commission     cases 
upon  appeal  before,  275 
on  cost  of  service  rates,  115 
report  of,  on  accidents  to  pas- 
sengers and  trespassers  on 
railroads,  266-267 
uniform  accounting  for  electric 
railways  under,   161 
Interstate  Commerce  Law  modi- 
fied by  courts,  317 
Interstate  trains  subject  to  state 
regulation,  324 


Interurban.     See  Street  and  in- 
terurban lines 
Invention,  291 

Investments  protected  under  in- 
determinate permit,  229 
Iowa  Public  Utility  Law,  2 
failure  of  local  regulation  un- 
der, 308,  310 
map      showing       fallacy      of, 

307 
problem  of  local  regulation  un- 
der, 302 
separate  classification  of  rates 
under,  129 
Iowa  Eailway  &  Light  Company, 
302,  307 

Jackson,  Carl  D.,  9 

Janesville,    comparative    loss    of 

electric  current  in,  190 
Janesville      physical      connection 

telephone  case,  201 
Jitneys,  under  regulation,  5 
Joint  rates  defined,  113 
Joint  use  of  street-car  tracks,  5, 

60 
Judicial  notice,  Commission  may 

take,  of  reports,  323 
Just     compensation     for     water 

powers,  258-259 

Kansas,  1 

Kaukauna     municipal     purchase 

case,  38,  234,  285 
Kaukauna     v.     Kaukauna     Gas, 

Electric    Light    <$•    Power 

Co.,       inadequate       rates, 

294 
Kenosha,     comparative     loss     of 

electric  current  in,  190 
utility  franchise  provisions  of, 

292 


360 


INDEX 


Kenosha  v.  Kenosha  Home  Tele- 
phone Co.,  339 

Kenosha  municipal  water  plant, 
operating  expense  of,  76 

Kerwin,  Justice  J.  C,  328 

Kilbourn,   285 

Kilbourn  City  v.  Southern  Wis- 
consin Power  Co.,  340-341 

Kilbourn  dam,  power  of,  307 

Knoxville  v.  Water  Co.,  cit., 
42 

La  Crosse,  water  supply  of,  219 

La  Crosse  v.  La  Crosse  Gas  <$' 
Electric  Co.,  franchise  pro- 
visions, 330,  334,  339 

La  Crosse  municipal  water  plant, 
comparative  loss  of  electric 
current  in,  190 
operating  expense  of,  76 

La  Crosse  telephone  case,  201 

La  Follette,  Eobert  M.,  2 

on  railroad  revenues,  110,  244 
(note) 

Lake  Geneva  municipal  purchase 
case,  234 

Lake  Mills,  285 

Land,  determining  the  value  of, 
for  rate-making  purposes, 
31 

Legal  expenses  considered  in  fix- 
ing valuation,  31 

Legislative  powers,  delegation  of, 
sustained,  319 

Less  than  carload  business,  effect 
of,  on  freight  rates,  122, 
130 

Livestock  rates,  275 

Lobbying,  345 

Local    conditions,    effect    of,    on 
depreciation,  84 
on  freight  rates,  135-136 


Local  conditions,   on  rate  of   re- 
turn,  47-48 
on  regulation,  298 
on  settlement  of  utility  dis- 
putes, 281 
obviated    by   state   regulation, 

311 
state    Commission   as   clearing 

house  in  meeting,  287 
state  Commission  settles  strife 
arising  from,  284 
Local  rates,  defined,  113 
Local  regulation,  agencies  of,  2S9 
cannot  overstep  boundaries,  301 
defects  of,  298 

delays  and  expense  of,  308,  310 
expense  of,  to  locality,  300 
feasibility  of,  294 
inability   of,    to   adjust   rates, 
306 
to    obtain    comparative    rec- 
ords, 299 
little  used,  293 
locality    not    natural    unit    of 

control,  300 
now  possible  under  state  super- 
vision, 292-293 
puts  utility  in  politics,  307 
system  of  control  under,  311 
would  lead  to  state  ownership, 
302 
Locomotive  miles,  13 
Log  driving,  franchises  to  facili- 
tate, 250-251 
Long  Island  Water  Supply  Co.  v. 

Brooklyn,  cit.,  40 
Lumber  rates,  274 

McGowan  v.  EocJc  County  Tele- 
phone Company  and  Wis- 
consin Telephone  Com- 
pany, 201 


INDEX 


361 


McKinlcy     Telephone     Company 
v.    Cumberland   Telephone 
Company,  342 
McPherson,  Judge,  on,  delays  of 
local  regulation,  308 
expense  of,  310 
Madison,     comparative     loss     of 
electric  current  in,  190 
discrimination      in      telephone 
rates  before  regulation  in, 
296 
extension  of  water  mains  or- 
dered for,  220 
operation   of    municipal   water 

plant  in,  76 
reductions  in  electric  rates  for, 

192 
street  railway  service  in,  60 
Madison  v.  Madison  Gas  $■  Elec- 
tric Co.,  shows  inability  of 
local  regulation,  310 
Maine,  1 

Maltbie,   Milo   E.,   on  indetermi- 
nate permits,   235 
Manitowoc,   comparative   loss   of 
electric  current  in,  190 
municipal  purchase  ease  of,  38, 

39,  234 
operation   of   municipal  water 
plant  in,  76 
Manitowoc      v.      Manitotvoc     Sf 
Northern      Traction     Co., 
franchise  provisions,  330 
Maps,  303,  304,  305,  306 
Margin  of  profit,  321,  325 
Market  value,   27 

of  securities,  242 
Marshall  &  Ilsley  Bank,  on  in- 
creased    sale     of     utility 
bonds,  315 
Marshall,  Justice  R.  D.,  329,  336, 
341 


Maryland,  1 

Massachusetts,  bond  law  of,  quot- 
ed, 237 
recognition     of     indeterminate 

permit  in,  228 
system  of  regulation  in,  308 
Mathews,   George  C,  on   defects 
of    local    control    in    Mil- 
waukee 304 
on  inadequacy  of  local  utility 
regulation,  291 
Medford,  285 
Medical      supplies      carried      on 

trains,  272 
Meter  charge,  copied  from  other 
cities,  215 
for  water  service,  149-150,  212 
Meter  tests,  62 

before  regulation,  64 

gas    meter     requirements,     64- 

65 
made  in  private  and  municipal 
plants,  286-287 
Meyer,  B.  H.,  9 

on    discriminations    in    utility 
rates     before     regulation, 
295 
Michigan,   1 

problem  of  local  regulation  in, 
302 
fallacy  of,  309    (map) 
Mile  of  main,  system  of  basing 

water  rates  on,  211 
Milk  station  service  case,  325 
Mill  dam  act,  sustained  by  court, 

250 
Milling  in  transit.     Sec  Transit 

rate 
Milwaukee,    Commission    branch 
office  in,   13,  16 
comparative    loss     of     electric 
current  in,  190 


362 


INDEX 


Milwaukee,    cost    of    gas    plant 
valuation  in,  300 
electric  railway  service  of,  60, 

160,  313 
grade-crossings,     ordered     for, 

271 
local  regulation  in,  304 
municipal  water  plant  of,  76 
street-car  franchise  in,  291 

valuation  of,  300 
street  railway  fare  case,    167, 
331,  332 
sustained  by   United  States 
Supreme  Court,  334,  344 
water     works     in,     value     and 

earnings  of,   279 
Wisconsin  Lakes  Ice  &  Cartage 
Co.  case,  323,  331,  332 
M.  St.  P.  &  S.  S.  M.  R.  Co.,  cost 
of   new   stations   built  by 
Commission  orders  for,  265 
M.  St.  P.  &  S.  S.  M.  R.  Co.  v. 
Railroad  Commission,  319- 
322 
Minimum  charge  for  water,  216, 

218 
Missouri,  2 
Mondovi,       lengthened       electric 

light  service,  171 
Monopoly,  court's  interpretation 
of,  230 
regulated,  232 

robbed   of   objectionable   pow- 
ers, 231 
under     indeterminate     permit, 
229 
Montana,  2 
Montfort,  285 

Mosinee  Electric  Company,  amor- 
tization of,  233 
Movement  expenses,  120 
analyzed,  123-124 


Movement  expenses,  denned,  121 
Mule  traction  systems,  159 
Mulvey,  Thos.,  on  control  of  cap- 
italization, 244  (note) 
Municipal  ownership,  7,  18 

account  systems  installed  un- 
der, 285 

assistance  rendered  to,  by  Com- 
mission, 208,  284,  287 

capital  obtained  cheaper  for, 
47 

cities   under,   seldom   regulate, 
293 
want  rates  approved,   282 

classes,  of  service  rendered  by 
municipal     plants     under, 
280 
of  state  aid  given  to  munici- 
palities under,  284 

crossing  orders  under,  effect  of, 
326 

delay  of  municipal  authorities 
in  adopting  uniform  ac- 
counting under,  78 

duplicate  utility  investments 
under,  227 

engineering  aid  given  by  Com- 
mission under,  287-288 

highest  efficiency  attained  un- 
der, 277 

improvements  in  service  under, 
285 

inequalities  of  rates  under,  281 

municipal    plants    under,    and 
private    plants    compared, 
286-287 
number   and   value   of,   278- 

279 
regulated  as  private  plants, 
206,  207 

no  telephones  in  Wisconsin  un- 
der, 278 


INDEX 


363 


Municipal  ownerships,  overhead 
charges  allowed  in  con- 
struction under,  rate  of,  30 

pay   for   service   rendered  un- 
der, 145 

plants  placed  on  business  basis 
by,  99 

protection   under,   as   to   rates 
and  service  needed,  277 

purchase  cases   under,  list  of, 
38,  234 

rates  under,  computed  on  same 
basis  as  private  plants,  281 

regressive    rates    under,    illus- 
trated, 283   (chart) 

unit  costs  of  water  plants  un- 
der, compared,  76 

value      of      municipal      water 
plants  under,  209 

water  works  under,  61 
Municipal   plants,   aid   given   to, 
348 

effect  of  indeterminate  permit 
law,  337 

may    purchase    water    powers, 
258 

Navigation,  franchises  granted  to 

improve,  250 
Nevada,   2 
New   Hampshire,  2 
New  Jersey,  2 

Public  Utilities  Commission  of, 

41 
New  London,  285 
New  York,  state  decision  on  stock 

and  bond  issues  in,  246 
state  regulation  of  utilities  in, 

289 
system  of  regulation  in,  308 
Noisy  operation  of  electric  cars 

abated,  166 


Non-monetary  stock  law,  240 

Normal  costs  used  in  rate  ad- 
justments, 299 

Normal  prices,  23 

North  Dakota,  252 

Norton,  William  J.,  on  indeter- 
minate permits,  235 

Noyes,  Walter  C,  quoted  on  rail- 
road rates,  114 

Official  classification,  129 

Ohio,  2 

Omro,    lengthened    electric    light 

service  in,  171 
Operating   revenues,   analysis   of 
operating   expenses   neces- 
sary in  determining,  280 
classification  of,  74 
compared  with  construction  ex- 
penditures, 102 
increase  of,  105 
must  show  depreciation  allow- 
ance, 95 
of  municipal  water  plants,  76 
showing  dividend  accounts,  103 
Orders  of  Commission,  19 
appealed  to  courts,  318 
considerations  of,  96 
only    unlawful    and    unreason- 
able, disturbed,  322 
penalty  for  violation  of,  8 
when  unreasonable,  321 
Oregon,  2 
Original  cost  valuation,  28 

elements  entering  into,  29 
Oshkosh,  comparative  loss  of  elec- 
tric current  in,  190 
Oshkosh    water-works    municipal 

purchase  case,  38,  234 
Output  cost,  defined,  144 
how  determined,  148-149 
illustrated,  150-153,  181 


364 


INDEX 


Output    cost,    of    water    plants, 

217 
Overhead    charges,    classification 

of,  31 
rates  allowed  for,  30 

Passenger  earnings,  109 

not  under  Commission  control, 

110 
separation    of,    from    freight, 
120 
Passenger   trains,    must   stop   at 

small  stations,  324 
Passengers,  accidents  to  railroad, 

266-268 
Passes,  5,  110 

Penalty  for  violating  orders,  8 
Pence,  W.  D.,  14 
Pennsylvania,  2 
People's  Gas  Light  &  Coke  Co. 

case  cit.,  41 
People's  Teleplione  Co.  v.  Lewis 

case,  341 
Perpetual  franchises,  defined,  224 

See  also  Franchises 
Physical      connection      of      tele- 
phones, 199-202 
impossible  under  local  regula- 
tion, 301 
litigation   concerning,   343 
Physical   valuations,   cost   of   re- 
production in,  21-42 
franchise  value  in,  36 
going  value  in,  33 
good  will  in,  35 
list  of,  42 

of   railroads,  5,   15,   21-27 
of  utilities,  5,  18,  27-42 
original  cost  of  property  in,  28 
Piecemeal  construction,  28 

consideration     of,     in    valuing 
property,  29 


Plant    investment,    increase    in, 
of  electric  plants,  315 
of  electric  railways,  314 
of  gas,  315 
of  telephones,  315 
of  water,  315 
Plant     value,     depreciation     in- 
creases  in    proportion   to, 
105 
increases  in,  102 
Plymouth,  285 
Police  power  of  states,  fields  of 

exercise  of,  255 
Polk  v.  Railroad  Commission,  va- 
lidity of  crossing  law,  326, 
327 
Population,  effect  of,  on  interur- 
ban  development,  314 
on  railroad  train  service,  324 
Portage,      requests      engineering 

aid,  288 
Potts,  Charles  S.,  on  Texas  stock 

and  bond  law,  237 
Power    expense,    comparison    of, 

for  electric  utilities,  98 
Powers  of  Eailroad  Commission, 
construed  by  courts,  318 
delegation    by    legislature    of, 

319 
to  make  rates,  320 
Pressure  for  fire  service,  216 
Prices,  averaged  for  five  years,  23 
decline  of,  from  1873  to  1896 

and  increase  of  since,  51 
used  in  obtaining  values,  30,  37 
Privately    owned    water    plants, 
208 
of  utilities  compared  with  mu- 
nicipal plants  in   Wiscon- 
sin, 278-279 
Profit,  an  element  in  rate  of  re- 
turn,  44,   50 


INDEX 


365 


Profit,      considered     in      making 
utility  rates,   144 
effect  of  large  salaries  on,  54 
in    profit   and    loss    statement, 

72,  73 
margin  of  allowance  for,  321, 

325 
only  one  factor  in  regulation, 

278 
shown  by  few  municipal  plants, 
206 
Profit   sharing  of   utilities,   6 

when  lawful,  232 
Promotion,    considered    in    fixing 

valuation,  31 
"Public,"  defined  by  court,  343 
Public  health,  effect  of  poor  wa- 
ter supply  on,  218 
Public  utilities,  5 
municipal,  5 
private,  5 
Publicity,  5,  6 
need  of,  244 
value  of,  345 
Pulpwood,  rates  for,  274 
Pumping  costs,  76 

Eacine     water-works    case,     234, 

307 
Eailroads,    accidents    to    passen- 
gers   and    trespassers    on, 

266-268 
accomplishments  of,  263-275 
attack   on   constitutionality  of 

Railroad  Commission  law, 

319 
convenience  and  necessity  laws 

in  other  states  concerning, 

221-222 
credit  of,  maintained,  312 
crossing  protection  of,  268-273 
earnings  of,  contrasted,  313 


Railroads,    evils   of    overcapitali- 
zation of,   238-239 

extensions  of,  313 

industry  of  world,  313    (note) 

rate  of  return  allowed  to,  55 

service  of,  opposition  to  change 
of,  262-263 

service  requirements  of,   58-59 

stock  and  bond  law  concerning, 
237 
Railroad     Commission    a     quasi- 
judicial  tribunal,  319 

control  of,  over  water  powers, 
255 

cost  of  administration  of,  347 

court's  mandate  on  unreason- 
able orders  of,  322 

decisions  appealed,  318 

may  regulate  interstate  trains, 
324 

powers  delegated  to,  320 

success  of,  345,  347 
Railroad  construction,  22 

amounts    needed     for     capital 
and  refunding  in,  53 

annual  valuations  of,  42 

cost    of    reproduction    of,    de- 
fined, 25 

original  cost  of,  24 
Railroad    regulation,    future    of, 

348 
Randolph,  water  rates  in,  exam- 
ple of  regressive  schedule 
of,  282,  283 
Raper,   on   "Railroad   Transpor- 
tation," 313    (note) 
Kate  of  return,  43-56 

defined,  43-44 

greater   for   new   construction, 
46 

lower,    for   inefficient   manage- 
ment, 192 


366 


INDEX 


Bate     of     return,     of     municipal 
plants,   277 

reasonable,  54 
Rates,  advances  in,  16 

applications  from  cities  for  ad- 
justments of,  284 

change  in,  must  have  approval 
of  Commission,  274 

computed  on  same  basis  as  pri- 
vate plants,  281 

defects  in  adjustment  of,  298 

discrimination  in,  under  local 
control,  295 

evidence  that  may  be  consid- 
ered in  fixing,  323 

fixing  of,  an  attribute  of  sov- 
ereignty, 332 
sustained  by  court,  319 

for  electric  railways,  power  of 
state  to  fix,  331 

for  express,  276 

for  gas,   185-189 

for  interurbans,  166-167 

for  utilities,   16 

freight,  3,  110,  120,  131-132 

impossible  to  regulate,  in  fran- 
chises, 292 

inequality  of,  281 

lack  of  comparative  unit  costs 
in,  299 

making  of,  and  taxation  value 
compared,  26 

may  be  reasonable  one  year 
and  not  the  next,  291 

must  be  just  between  private 
and  municipal  users,  280 

of  municipal  plants,  278,  280 

of  railroads,  power  to  make 
freight,  304 

one  hundred  thousand,  passed 
upon  by  Commission,  274, 
275 


Rates,   passenger,   110,    120 

power  of  Commission  to  make, 

320 
power  to  fix,  must  be  delegated, 

333 
reductions  in  freight,  275 
results      of      adjustments      of, 

297 
under  local  regulation,  294 
utility  and  electric,  172-174 
when  reasonable,  321 
Readiness-to-serve      method      of 
making  electric  rates,  182 
Rebates  prohibited,  4,  110 
Reduced   fare   cases,    of    electric 
railways.      See   Milwaukee 
v.  T.  M.  E.  B.  4-  L.  Co.; 
Superior  Commercial  Club 
v.  Duluth  Street  By.  Co. 
Reductions  in  freight  rates,  274- 

276 
Refrigerator  lines,  3 
Refunds      for      overcharges,      4, 
276 
See  also  Reparation 
Regressive    rates,    for    municipal 
plants,  282,  283   (chart) 
for  water,  215 
Regulation,  necessity  of,  for  mu- 
nicipal plants,  207 
Reparation  laws,  proceedings  un- 
der, 111 
validity  of,  327 
See  also  Refunds 
Reports,    annual,    from    all    rail- 
roads and  utilities,  187 
considered  in  making  decision, 
323 
Reproduction    of    water    powers, 

259 
Reproduction  costs.     See  Cost  of 
reproduction 


INDEX 


367 


Reservoirs  on  Wolf  and  Wiscon- 
sin  rivers,   251 
Revenue  accounts,  compared  with 
depreciation       allowances, 
105 
compared    with    operating    ex- 
penses, 105 
Reyer,  W.  C,  need  of  state  regu- 
lation of  municipal  plants, 
281    (note),  298    (note) 
Rhode   Island,   2 
Richards,  Ralph  C,  reduction  of 
railroad  accidents  through 
safety  committees,  272-273 
Riley,  Miles   C,  special   investiga- 
tion by,  of  Wisconsin  wa- 
ter-power franchises,  250 
Riparian    owner,    court    decision 
concerning,  253 
rights  of,  252 
Risk,    influence    of,    on    freight 
rates,   122,  125 
on  rate  of  return,  49 
Roadbed,  4 

Rock  County  telephone  case,  201 
Roe,  G.  E.,  317    (note) 
Roemer,  John  H.,  9 

on  character  of  utility  service 

before  regulation,  58 
on  indeterminate  permits,  222 

(note) 
on   stock  and  bond   law,   240, 

244 
on  valuations  of  utilities,  28 
Rolling  stock,  inspection  of,  59 
Rules   of   service,   reasonableness 

of,  343 
Rural  telephone  lines,  border  ter- 
ritory decision  concerning, 
203-204 
number  of  exchanges  on,  196 
service  of,  342 


Safety,  committees  for,  273 
of  railroad  service.  263-272 
on   railroads,   4 
Saint  Paul,  expense  of  local  reg- 
ulation in,  300 
Salmon,  C.  E.,  on  effect  of  state 
regulation     on     securities, 
315 
Sand  and  gravel  rates,  275 
Sanitation,  in  cars  and  depots,  4, 
59 
on  interurbans,  164 
requirements  for,  in  water  ser- 
vice, 218 
Saturation  of  territory,  principle 

of,  recognized,  297 
Savings  in  railroad  rates,  275 
through  regulation,  of  electric- 
ity, 64,  192 
of  gas  66,  192 
to  public,  346,  347 
Saw  log  rates,  133 
Schedule,     for     electric     service, 
172-174 
for  interurbans,  163 
for  municipal  and  private  plant 
rates    computed    on    same 
basis,  281 
for  trains,  4 
for  water  service,  211 
of    just    rates    impossible    in 

franchises,  291 
of  rates  for  utilities  must  be 

equitable,  278 
of    regressive    rates,    282,    283 

(chart) 
results  from  adjusting,  297 
state  aid  in  making,  284 
Securities,    authorization    of,    in 
Wisconsin,  247-248 
effect   of   increased   prices   on, 
52 


368 


INDEX 


Securities,   effect  of  local   condi- 
tions on,  48 

evil  of   unlimited   right  to   is- 
sue,  241-242 

excessive    amounts    of,    disre- 
garded in  fixing  rates,  45 

railroad  and  utility,  approved, 
237 
Security  issues,  312-316 

for  development  of  other  utili- 
ties, 312-315 

impossibility  of,  297-298 

plan   under   local   control   for, 
294 

railroad  credit  maintained  by, 
312 

sale  of,  315-316 
Service,  accomplishments  of,  263- 
273 

complaints  against,  of  munici- 
pal plants,  280 

condition    of,    before    regula- 
tion, 5S-63 

considerations  in  orders  for,  96 

decisions  in  railroad  case  con- 
cerning, sustained,  319 

improvements  in,  312 

of  municipal  utilities,  285 

must  give,  to   shippers,   325 

of      municipal      and      private 
plants  compared,  287 

of  railroads,  262-273 

of  street  and  interurban  roads, 
162 

of  telephone  companies,  57-58, 
66-67,  195 

of  utilities,  10,  57-68 

opposition  to   change  in,   262- 
263 

orders  for,  must  be  reasonable, 
321 

railroad,  standards  of,  4,  10,  59 


Service,   railroads   must  give,   to 
villages,  324 
rate  cases  concerning,  adjusted, 

284 
requirements  for,  generally  sus- 
tained,  323 
requirements  of  franchise  and 
Commission  rules  for,  con- 
trasted, 290 
telephone,    agreements   regard- 
ing local  and  toll,  342 
train,   324 

under  local  regulation,  294 
Sharon,  285 

Sheboygan,  municipal  water  plant 
or,   operating   expense   of, 
76 
purchase  case  of,  234 
service  of,  219 
Shortage  of  cars,  4 
Short-  and  long-haul  clause,   128 

(note) 
Short-term     franchises,     defined, 
225 
See  also  Franchises 
Sinking  fund  method,  90 

compared  with  ' '  straight-line ' ' 
method,  91-92 
Sleeping-car  lines,  3 

upper  berth  law  sustained  for, 

323 
value  of,  9 
Smith,  Herbert  Knox,  report  of, 
on  nation's  water  powers, 
250    (note) 
Smith,  L.  S.,  report  of,  on  devel- 
oped and  undeveloped  wa- 
ter  powers   in   Wisconsin, 
251 
Socialists,    criticism   of   Calumet 

Service  case  by,  337 
Southern  classification,  129 


INDEX 


369 


Southern  Wisconsin  Railway  Co., 
evils  of  proposed  overcap- 
italization of,  239 
Speculator,    effect   of    stock   and 

bond  regulation  on,  240 
Speed  of  trains  regulated,  272 
Spokane,  effect  of  growth  of,  on 

franchises,  292 
Sprinkling     wagon,     variety     of 

charge  rates  for,  213 
Spur  track  law,  59 
requirements   of,   325 
sustained  by  federal  court,  325 
Spur  tracks,  4 

extensions  of,  ordered,  265 
Standards   of   service.     See  Ser- 
vice Standards 
State,  ex  rel.  M.  St.  P.  #  S.  S.  M. 
II.    Co.    v.   Railroad   Com- 
mission, validity  of  stock 
and  bond  law,  328 
ex  rel.  Northern  Pacific  v.  Bail- 
road  Commission,  validity 
of  convenience  and  neces- 
sity law,  327 
paramount  in  fixing  rates,  332 
State  Journal  et  al.  v.  Madison 
Gas  $■  Electric  Co.   (quot- 
ed), 29,  53 
on   depreciation    (quoted),   88- 

89 
on  further  reductions  of  elec- 
tric rates,  192 
State  ownership  in  water  powers, 
discussed,  252 
view   of  legislature   regarding, 
254 
State  regulation,  aid  under,  given 
to  municipal  plants  in  ac- 
counting and  service,   2S5 
contrasted    with    local    regula- 
tion, 309-310,  311 


State    regulation,    control   of    lo- 
cal plants,  by,  289 

delays   and   expenses   of,    309- 
310 

discriminations  under,   and  lo- 
cal control,  296 

economy   of    accounting    under 
state  regulation,  299-300 

engineering  aid  given  to  cities 
under,  287-288 

improvements  in  municipal  ser- 
vice under,  286-287 

in   future,   348 

legal  theory  of,  2S9 

necessity  for,  281 

of  municipal  plants,  280 

of  utilities,  277-311 

power    of,    inherent    in    state, 
301 

results  of,  297 

supervision  of  "Home  Rule" 
regulation  under,   292-293 

sustained,  319 

takes  utilities  out  of   politics, 
308 

three  classes  of  state  aid  un- 
der, 284 

to  approve  schedules,  282-283 
Stations,    adequacy    of    facilities 
of,  59 

dilapidated  buildings  replaced 
by  new,  264 

list  of,  264-265    (note) 

on  electric  roads  improved,  164 
Statistical   department,    11-12 
Steam  expense,  and  water-power 
costs  compared,  260-261 

comparison     of,     for     electric 
utilities,  98 
Step  meter  rate,  defined,  172 
Stevens,   Judge   E.    Ray,   on    re- 
duced fares,  233 


370 


INDEX 


Stock  and  bond  law,  10 

as  basis  for  other  states,  329 

does  not  validate  past  issues, 
246 

enactment  of,  237 

penalty  for  unauthorized  is- 
sues under,  246 

provisions  of  Wisconsin,  240 

relationship  of  stock  to  bonds 
under,  241 

sustained,   328 

use    of    money    for    issues    of 
stocks    and    bonds    under, 
241 
Stocks,  exemption  of,  from  regu- 
lation, 244 

need  of  greater  regulation  of, 
243 
Stocks  and  bonds,  237-248 

benefits  of  supervision  over, 
245 

cases  concerning,  before  Com- 
mission, 17 

Commission  investigates  expen- 
diture of  receipts  from, 
242 

evils  of  overcapitalization  of, 
238-239 

laws  governing,  in  other  states, 
238 

sale  of,  for  railroad  construc- 
tion,  24 

total  authorization  of,  in  Wis- 
consin summarized,   247 
Stockholders,   interest  of,  in  de- 
preciation, 83 
Stopping  of  trains  at  small  sta- 
tions,  264 

decision  regarding,  sustained, 
319 

on  electric  roads  ordered, 
164 


Stopping  of  trains,  requirements 

of  law  concerning,  324 
"Straight   line"   method   of   de- 
termining       depreciation, 
compared      with      sinking 
fund  method,  91-92 

defined,  85,  88 

illustrated,  86-88 

meter  rate,  172 
Street  and  interurban  lines,   159 

amortization  of,  233 

application  of  stock  and  bond 
law  to,  237 

construction  expenditures  and 
operating  revenues  of,  102 

development  of,  contrasted 
with  other   states,  313 

dividend  account  of,  103 

early  history  of,  159 

increase  for  depreciation  of, 
105 

increase  of,  in  Wisconsin,  314 

indeterminate  permit  in  Mas- 
sachusetts in  case  of, 
228 

joint  use  of  tracks  of,  5 

Milwaukee  fare  case  concern- 
ing, 331-332 

municipal  purchase  of,  7 

operating  expense  and  reve- 
nues of,  106 

physical  valuations  made  of, 
42 

rate  of  return  from,  55 

right  to  increase  fares  of,  over 
franchise  rates,  330 

service  standards  of,  60-61 

supervision  of,  13 

surplus  accounts  of,  101 

under  Commission  control,  3, 
161 

value  of  properties  of,  9 


INDEX 


371 


Suits,  against  Commission,  17 
Superior,    street   railway    service 
of,  60 
comparative     loss    of     electric 

current  in,  190 
early  electric  railway  in,  160 
reduced  fare  case  of,  168 
street-car  franchise  of,  291 
Superior  v.  Douglas  County  Tele- 
phone Co.,  334,  338 
Superior    v.    Boerner    case,    326 

(note) 
Surplus  accounts,  increase  in,  un- 
der regulation,  100-101 
Switching,  4 

petition  to  change  rate  for,  274 

Tariff  department,  12,  16 

examination    of    railroad    ex- 
penses by,  118 
must  file  tariff,  111 
Taxes  on  railroads,  22 

taxation  and  rate-making  value 
compared  with,  26 
Taylor,  W.  D.,  22 
Telegraph  companies,  5 

valuation  of,  9 

Telephone  companies,  5,  193-205 

construction   expenditures   and 

operating  revenues  of,  102 

contracts  between,  in  restraint 

of  trade,  342 
development  of,  in  state,  315 
did  not  receive  optional  inde- 
terminate permit,  223 
dividend  account  of,  103 
franchises  for,  339 
in  Wisconsin,  not  municipally 

owned,  278 
increase   in   allowance   for   de- 
preciation of,   105 
local  service  of,  defined,  342 


Telephone      companies,      locality 
not  proper  unit  of  regula- 
tion  for,   300 
nine-tenths      of      systems     of, 
would  escape  local  regula- 
tion, 301 
non-duplication  of,  7,  202-205 
number    of    exchanges    of,    in 

state,  196 
operating    expenses    and    reve- 
nues of,  106-107 
physical  connection  of,  7,  199- 

202 
rate  of  return  from,  46,  55 
rates    for,     discrimination    in, 
before     state     regulation, 
295-296 
standards  of  service  of,  57-58, 

66-68 
stockholders'  rights  in,  341 
surplus   accounts  of,   101 
validity    of    contracts    of,    be- 
fore regulation,  338,  339 
valuation  of  properties  of,  9 
Telephone  exchanges,  duplication 

of,   unwise,   343 
Tentative  valuation  defined,  37 
Terminal  expenses,   120 
defined,  121 

effect  of,  on  freight  rates,  137- 
142 
Texas  stock  and  bond  law,  quot- 
ed, 237 
Thelen,  Max,  19 

discusses  cost  of  service  rates, 
115   (note) 
Three  charge  demand  rate,  elec- 
tric, 174 
Through    freight    rates,    defined, 
113 
effect  of,  on  rates  for  articles 
transported,    125 


372 


INDEX 


Through     freight     rates,     illus- 
trated, 138-142 
lower   than   way   freight,   137- 
138 
Timlin,  Justice  W.  H.,   319 
Toll  bridges,  10 
Toll    service,    67 

See  also  Telephones 
Ton    mile,    costs    of,    vary    with 

loading,  123,  125 
Tracks,   extension   and   abandon- 
ment of  street  and  electric 
railway,  165 
increase  of  interurban,  314 
inspection  of,  59 
joint  use  of  street-car,  5,  60 
miles  of  railroad,  in  state,  313 
compared    with    world,    313 
(note) 
to  industries,  325-326 
"Traffic  will  bear,"  effect  of,  on 
classification,  131-132,  133 
principle  of,  discussed,  114 
rates  based  on,  113 
Train  accidents,  266-268 
Train  miles,  13 
Train    service,    requirements    of, 

324 
Transit  rate,  112 
Trespassers,    accidents    to,    266- 

268 
Two-cent  passenger  fare  law,  110, 
275 

Uniform  accounting,  69-7S 
applied  to  railroads,  117,  118 
conditions     of     municipal     ac- 
counts   before    regulation 
by,  284 
cost    of     obtaining,    by    local 

units,  299 
depreciation  charges  in,  81 


Uniform     accounting,     for     tele- 
phone companies,   195 
importance  of,   75,   77,  97,  98 
necessity  for,  298,  299 
need   of,   in   municipal  plants, 

281 
recording   depreciation  in,   94- 

95 
systems  of,  installed  by  state, 

285 
See  also  Accounting 
Union  depots  ordered,  265 
Union  stations  may  be  ordered, 
59 
See  also  Stations 
Unit  costs,  abnormalities  of,  dis- 
covered,  76,  188-189 
cost  of  obtaining,  299 
establishing  of  accounting  sys- 
tems showing,  284-285 
for  utilities,  14 
importance  of,  76,  97-98 
in  electric  service,  182 
in  making  water  service  rates, 

149 
necessity     for,     in     municipal 

plants,   280 
of  railroads,  14,  117,  118,  123, 
124,  126,  127 
University  of  Wisconsin,  17,  19 
Upper  berth  law  sustained,  323- 

324 
Utilities,  classes  of  aid  given  to, 
.     284 
construction    of,    original   cost 
of,  27-28 
overhead  charge  allowance  in, 

30 
piecemeal,  28 
convenience  and  necessity  laws 
governing,  in  other  states, 
221-222 


INDEX 


373 


Utilities,  effect  of  law  governing, 
cannot   be  evaded,  340-341 

evils  of  overcapitalization  of, 
238-239 

expenses  of,  separated  into  de- 
mand, output  and  consum- 
ers' cost,  144 

fair  value  for,  37 

franchises  for,  329 

in  future,  348 

physical  valuation  of,  cases,  42 

rates  of,  effect  of  unjust,  143 
for  electric  'concerns,  172-174 
for  gas  companies,  185-189 
See  also  Cost  of  service  rates 

smaller,  request  most  aid  from 
state,  278 

state  aid  given  to  municipal 
plants  of,  285 

stock  and  bond  law  concern- 
ing, 237 

Valuation,  21-42 

court    and    Commission,    com- 
pared, 38 
fair  value  for,  37 
first  physical,  made,  42 
obtaining  present  value  in,  30 
of  other  utilities,  9,  15 
of   property   for  taxation   and 
rate-making  compared,  26 
of  railroads,  9,  15,  21 
railroad,  42 

See  also  Physical  valuation 
Value    of    service,    principle    of, 
discussed,  114 
rates  based  on,  113 
Vanderlip,  Frank  A.,  on  demands 

for  capital,  52-53 
Van  Hise,  Charles  R.,  on  value  of 
water    powers    in    United 
States,  249-250  (note) 


Variable  expenses,  defined,  117 
for  gas  and  electric  service,  154 

Vermont,  2 

Village,    train    service   furnished 
to,  324 

Vinje,  Justice  A.  J.,  324 

Voltage,  constancy  of,  62 
recent  improvements  in,  63 

Wages,  4 

of  management,  53 
Walbridge  v.  Berlin  Public  Ser- 
vice Co.  case,  343 
Washington,  2,  252 
Water-power    legislation,    8,    15, 
249-261 

enactment  of  Husting  law  for, 
253-254 

fees  for  supervision  under,  256 

first  law  of,  invalid,  252 

for  safety,  255 

granting  of  franchises  provid- 
ed for  in,  254 

history  of,  250 

modifications     in,     1915,     256 
(note) 

powers  classified  by,  257 

sale  of  product  provided  for  in, 
258 

terms   of   franchises,   provided 
for  in,  259 

value  of,  in  United  States,  250 
(note) 
Water  powers,  developed  and  un- 
developed in  Wisconsin,  251 

compared    with    steam    power, 
260,  261 

developments  of,  260 

how  franchises  for,  are  grant- 
ed, 254 

question  of  state  ownership  of, 
252 


374 


INDEX 


Water    powers,    state    may    pur- 
chase, 259 

use  of  developed,  251-252 
Water  utilities,  5,  206-220 

classes  of  patrons  served  by, 
212-213 

construction  expenditures  and 
operating  revenues  of,  102 

depreciation  tables  for,  86-87, 
93 

development  of,  315 

discrimination  in  rates  of,  be- 
fore regulation,  296 

dividend  account  of,  103 

engineering  advice  to,  300 

expense  of  service  for  private 
and  public  use  divided  for, 
145 

failure  of  local  control  of,  309 

increases  for  depreciation  of, 
105 

list  of  municipally  and  pri- 
vately owned,  279 

local  strife  of,  at  Sparta,  284 

making  water  rates  for,  150- 
153,  217 

operated  by  cities,  208 

operating  expense  and  reve- 
nues of,   106 

optional  indeterminate  permits 
to,  222 

placing  of,  on  business  basis,  99 

purity  of  product  of,  necessary, 
218-219 

rate  of  return  of,  46,  55 

rates  for,  before  regulation, 
210 

records  of,  before  regulation, 
299 

regressive  rates  of,  illustrated, 
283   (chart) 

standards  of  service  of,  61 


Water  utilities,  surplus  accounts 

of,   101 
unit  costs  of  municipal  plants 

compared  with  cost  of,  76 
valuation  of,  9 
value     of     private     municipal 

plants  of,  209 
Watertown,   comparative  loss  of 

electric    current    in,    190, 

307 
Watertown        municipal       water 

plant,    operating     expense 

of,  76 
Waukesha  municipal  water  plant, 

operating       expense       of, 

76 
Wausau    municipal   water   plant, 

operating       expense       of, 

76 
Way  freight,  effect  on  rates  for 

articles     transported     by, 

125 
rates  for,  illustrated,  138-142 
rates  usually  higher  for,  137, 

138 
Weight    of    articles,    effect    on 

freight    charges    of,    122, 

123 
West  Virginia,  2 
Western   classification,   129 

division  of  commodities  under, 

129 
method  of  applying,  to  cost  of 

service    rates,    138-141 
Whitewater    municipal    purchase 

case,  234 
Wilcox,   Delos  F.,  on  results  of 

state  regulation,  288,  300, 

302 
Winslow,  Chief  Justice  J.  B.,  on 

progress  in  ideals,  317 
on  rates,  case  cit.,  332-333 


INDEX 


375 


Winslow,  Chief  Justice  J.  B., 
opinion  in  Appleton 
Water  Works  case  of, 
cit.,   39 

Winter,  Frank,  v.  La  Crosse  Tele- 
phone Co.  and  Wisconsin 
Telephone  Co.,  physical 
connection  cases,  201 

Wisconsin,   conservation   commis- 
sion of,  created,  249 
findings  of,  251 

Wisconsin      plants,      how      they 
might    escape    local    regu- 
lation, 302,  303    (map) 
physical  connection  case  at  La 

Crosse,  201 
Tax  Commission  of,  21 

Wisconsin  Lakes  Ice  &  Cartage 
Co.  case,  323 

Wisconsin  Railroad  Commission 
Law,  1-5 


Wisconsin  Railroad  Commission 
Law,  supervision  of  pub- 
lic utilities  under,  5 

Wisconsin  River,  reservoir  system 
of,  251 

Wisconsin  Telephone  Co.,  extent 
of  service  of,  196 

Wolf  River,  reservoir  system  of, 
251 

Wood  rates,  275 

Working  capital,  31,  37 

Wrecks,  investigation  of,  59 

Wright  v.  Illinois  Central  Rail- 
road Co.,  262-263 

Wright  demand  rate,  electric,  173 
general  use  of,  177 

Wyoming,  252 

Yards,  inspection  of,  59 
Zone  rates,  167 


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